In re C2R Glob. Mfg., Inc., Case No. 18-30182-beh

In re: C2R Global Manufacturing, Inc., Debtor.

Case No. 18-30182-beh

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF WISCONSIN

March 30, 2021

Chapter 11

DECISION AND ORDER ON VERDE ENVIRONMENTAL TECHNOLOGIES, INC.'S MOTION FOR PARTIAL SUMMARY JUDGMENT

Verde Environmental Technologies, Inc. and the debtor, C2R Global Manufacturing, Inc., are direct competitors in the drug disposal product market. Verde manufactures and sells a product called the Deterra Drug Deactivation System, while C2R offers a line of drug disposal products under the name "Rx Destroyer." Verde alleges that C2R has engaged in false advertising under the Lanham Act by advertising that its products have the capacity to deactivate specific volumes of medication placed in the product through adsorption to activated carbon, and that the products do not (and cannot) perform as represented.

Verde has moved for partial summary judgment on the limited issue of whether C2R's "capacity" representations are literally false. In opposing Verde's motion, C2R asks the Court to grant summary judgment in C2R's favor as to the literal falsity of other advertisements outside the scope of Verde's narrow request. For the reasons that follow, the Court will grant in part and deny in part Verde's motion for partial summary judgment. C2R's request for summary judgment in its favor as to the literal falsity of other representations will be addressed in a separate decision.

PROCEDURAL BACKGROUND AND JURISDICTION

C2R commenced this Chapter 11 bankruptcy case in October 2018. Several months before that, in March 2018, Verde filed a lawsuit against C2R in the Eastern District of Wisconsin, asserting claims for patent infringement and false advertising (under both the Lanham Act, 15 U.S.C. § 1125(a), and the Wisconsin Deceptive Trade Practices Act, Wis. Stat. § 100.18). The district court litigation was stayed after the debtor filed for bankruptcy relief.

Verde filed a proof of claim in this case for over $6 million in money damages, based on the same causes of action asserted in its district court complaint. C2R objected to Verde's proof of claim, denying liability. The parties since have settled their patent infringement dispute, and Verde has withdrawn its reliance on the Wisconsin Deceptive Trade Practices Act, so only Verde's Lanham Act claim remains.¹

Because this dispute concerns the allowance or disallowance of claims, this is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The Court has jurisdiction under 28 U.S.C. § 1334 and the Eastern District of Wisconsin's July 16, 1984, order of reference entered under 28 U.S.C. § 157(a). To the extent that the issues may be deemed non-core but otherwise relate to the debtor's bankruptcy case, the parties have given their implicit consent to the entry of appropriate orders and judgments by the bankruptcy judge.

FACTS

The Court has reviewed each party's statement of proposed material facts and corresponding responses, and has credited each fact to the extent it has been admitted or is supported by admissible evidence, with genuine disputes resolved in favor of C2R as the nonmovant. With the foregoing in mind, the record reveals the following facts as being material to the dispute at hand.

A. The Parties

Verde is a Minnesota-based corporation that claims to develop "research-based, scientifically proven solutions to reduce drug abuse, misuse, andnegative environmental impact." See ECF Doc. No. 49, at 7, 40.² One of Verde's products is the Deterra Drug Deactivation System ("Deterra"). According to Verde, Deterra deactivates prescription drugs using a proprietary and patented activated carbon technology. Id. at 40.

C2R, a Wisconsin corporation, is one of Verde's competitors. C2R manufactures and sells a line of drug disposal products under the name "Rx Destroyer." The Rx Destroyer products also contain activated carbon, plus a liquid solution.

B. Drug Buster: C2R's first foray into the drug disposal product market

C2R entered the drug disposal market in 2011, as a contract manufacturer of drug disposal and deactivation products sold under the name "Drug Buster." See Verde's SPMF ¶ 1³; Verde's SPMF ¶ 2; C2R's APMF ¶ 6.⁴ C2R licensed the Drug Buster product from Sherry Day, a nurse who invented and procured a patent purportedly covering the product. See ECF Doc. No. 353-10 ("Wilbert Decl. Ex. 10"), Dallas Dep. at 25:10-26:24 (cited in C2R's APMF ¶ 7); see also AP-ECF Doc. No. 35 (C2R's Answer to Verde's Complaint), ¶ 24.

The Drug Buster product came in at least the following sizes: 4 oz., 16 oz., and 64 oz. See ECF Doc. No. 262 at 221-235 ("First Lorentz Decl. Ex. 14"). C2R represented the capacity of the various-sized Drug Buster products as follows: for the 4 oz. product, approximately 50 pills; for the 16 oz. product, approximately 300 pills; and for the 64 oz. product, approximately 1,500 pills. See Verde's SPMF ¶ 23; C2R's RPMF ¶ 23⁵; First Lorentz Decl. Ex. 14, at 222-23; ECF Doc. No. 353-1 ("First Lorentz Decl. Ex. 1"), Dallas Dep. at 66:13-18,67:10-68:7. It was Ms. Day who determined the capacities for the Drug Buster products and communicated them to C2R. See AP-ECF Doc. No. 35, ¶ 25.

C. The Rx Destroyer

In 2014, C2R launched its own line of drug disposal products—the products at issue in this litigation—under the name "Rx Destroyer." See Verde's SPMF ¶ 3. The products currently offered in C2R's Rx Destroyer line include, without limitation, the following:

• Rx Destroyer™ All-Purpose 5.0 Gallon Container

• Rx Destroyer™ All-Purpose 2.5 Gallon Bottle

• Rx Destroyer™ Pro-Series All-Purpose 1.0 Gallon Bottle

• Rx Destroyer™ Pro-Series All-Purpose 64 oz. Bottle

• Rx Destroyer™ All-Purpose 64 oz. Bottle

• Rx Destroyer™ All-Purpose 16 oz. Bottle

• Rx Destroyer™ All-Purpose 4 oz. Bottle

See Verde's SPMF ¶ 4, incorporating, as relevant, C2R's RPMF ¶ 4. C2R markets these products on its website, RxDestroyer.com.

C2R also sells what it describes as a "high-capacity version" of Rx Destroyer, NarcGone. NarcGone is identical to Rx Destroyer, but includes an additional 25% activated carbon. See C2R's APMF ¶¶ 28, 56.

1. How Rx Destroyer works

Rx Destroyer products consist of two active ingredients—(1) an aqueous (and slightly acidic) solution and (2) activated carbon—in a sealed plastic container. C2R has described the product line as follows on the Rx Destroyer website:

• System contains patented solution that begins dissolving medications on contact. Active medication ingredients are adsorbed or neutralized by activated charcoal. Adsorption time varies depending on additive and existing contents.

• Each container contains a carefully formulated balance of ingredients that will destroy to medication capacity.

• Rx Destroyer™ patented formula controls:

¦ Fast dissolving formulation breaks medications down quickly¦ Specialty formulated activated carbon process allow[s] for increased capacity

¦ Container system automatically controls internal pressure

See ECF Doc. No. 262 at 11-14 ("First Lorentz Decl. Ex. 4") (cited in Verde's SPMF ¶ 19 and C2R's RPMF ¶ 19). According to another advertisement:

Q: How does Rx Destroyer™ pharmaceutical disposal system work?

A: Rx Destroyer™ patented formula begin[s] dissolving medications on contact. As medications are dispersed the activated carbon adsorbs them rendering them useless for abuse. . . .

Follow link for additional information and test reports.⁶

ECF Doc. No. 262 at 18-27 ("First Lorentz Decl. Ex. 6") (cited in Verde's SPMF ¶ 20).⁷

Milton Dallas, a founder and co-principal of C2R, characterized the aqueous solution in the Rx Destroyer products as a "transfer agent" that allows the activated carbon to "accept" the medication. See First Lorentz Decl. Ex. 1, Dallas Dep. at 88:1-89:7 (cited in Verde's SPMF ¶ 21 and C2R's RPMF ¶ 21). Dallas testified that the solution is necessary for the Rx Destroyer products to work—"[a]ctivated carbon by itself, a dry activated carbon, does not neutralize anything"—and that the solution alone does not deactivate or destroy medication. See id. ("Q: [T]he solutions don't deactivate or destroy medicationsthemself; correct? A: Our particular aqueous solution does not. . . . Just the liquids in itself does not. It's a transfer agent.").

C2R's litigation expert, Dr. David Mazyck, disagrees with Dallas's description, and opines that the solution itself works to deactivate medication, see infra Section E.4.

2. What Rx Destroyer does

C2R's advertisements claim that the Rx Destroyer "destroys" and "[d]issolves, adsorbs, and neutralizes" medications. See First Lorentz Decl. Ex. 4 ("Each container contains a carefully formulated balance of ingredients that will destroy to medication capacity."); ECF Doc. No. 371, at 3 ("First Lorentz Decl. Ex. 2") (stating that the Rx Destroyer line "[d]issolves[,] adsorbs[,] and neutralizes non-hazardous medications (controlled & non-controlled substances)"); ECF Doc. No. 353-2 ("First Lorentz Decl. Ex. 7") (same); ECF Doc. No. 371, at 5 ("First Lorentz Decl. Ex. 8") (same).

One of the stated purposes of the Rx Destroyer products is to prevent drug abuse and diversion. On the "Q&A" section of its website, C2R has advertised how the Rx Destroyer achieves that goal:

Q: Can drugs be abused after placing in Rx Destroyer™?

A1: NO. "drug [is] NOT retrievable, because it is chemically bound in the activated carbon's pores. It takes commercial reactivation, furnace at 1700° to restore carbon. Their boiling points are too high for desorption without breaking bonds, so the drugs will never leave the pores as the whole and thus once adsorbed and the carbon bed is drained, there is no mechanism for the drugs to leave the pores as the original molecule." At this red heat adsorbate drugs are mineralized to carbon dioxide water.

Follow link for additional information and test reports.⁸

First Lorentz Decl. Ex. 6, at 21 (cited in Verde's SPMF ¶ 20);⁹ see also id. at 19 ("As medications are dispersed the activated carbon adsorbs them rendering them chemically useless...