SDNY Dismisses Third Party Payor Class Action
One of the more interesting developments in the rise of consumer fraud class actions has been the involvement of third party payors (or "TPPs") -- such as union health benefit plans -- as plaintiffs in these cases. These TPPs pay for medicines prescribed for individual members of these health benefit plans; the TPPs maintain a list or "formulary" of approved medicines for which they will pay, and they often contract with a pharmacy benefit manager to manage the formulary and approve claims.
These health and welfare benefit organizations often have a relationship with a plaintiffs' law firm from having made claims in securities class actions. But consumer fraud cases are far, far different from securities fraud cases because they do not presume reliance; rather, it has to be pled and proven. And that's where these TPPs often have a problem, because they typically are unwilling to go through their own voluminous documents to establish reliance on an individual doctor-by-doctor basis, and the underlying transactions are covered by privacy laws. Accordingly, the name of the game for TPPs is to keep the pleadings as generic as possible, so as to avoid these issues and try to skirt by the obvious predominance and superiority problems that they raise.
Yesterday -- in a decision won by my partner, Mark Cheffo -- Judge Kimba Wood dismissed a putative class action of TPPs brought against Pfizer because they failed to plead the necessary reliance. See Southern Illinois Laborers' and Employers Health and Welfare Fund v. Pfizer Inc., Civ. A. No. 08 CV 5175 (KMW), Slip Op. (S.D.N.Y. Sept. 30, 2009). In Southern Illinois Laborers, the plaintiffs were eleven health and welfare funds that sought to represent a nationwide class of TPPs that had paid for Lipitor, Pfizer's blockbuster cholesterol-lowering medication. They asserted causes of action under RICO, state consumer protection statutes, and common law unjust enrichment, negligent misrepresentation, and civil conspiracy. Plaintiffs alleged that Pfizer (1) misrepresented certain guidelines promulgated by an expert panel regarding who would benefit from lowering low-density lipoprotein (LDL cholesterol) levels, (2) failed to disclose and fraudulently minimized to physicians Lipitor's side effects, (3) misled physicians and pharmacy benefit managers about what patient groups would benefit from taking Lipitor. They also alleged that Lipitor cost more than other statin medicines, and that they would not have paid a premium for Lipitor but for their reliance on a statement on the defendant's website that said it was lawfully advertising Lipitor.
Applying the strict pleading standard of Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), Judge Wood held that "that Plaintiffs have not adequately alleged causation, and, thus, they lack standing to bring any of their claims against Defendant." Slip op. at 8. She did, however, grant Plaintiffs leave to amend most of their claims.
In analyzing the RICO claim, Judge Wood noted that standing requires three elements: (1) a RICO violation, (2) an injury to the plaintiff's business or property, and (3) a causal relationship connecting the RICO violation to the plaintiff's injury. She focused on the causation element, which requires that plaintiff plead both a "but for" cause and a "proximate" cause. Proximate cause, she observed, demands "'some direct relation between the injury asserted and the injurious conduct alleged.'" Slip op. at 13 (citation omitted).
Plaintiffs advanced three different theories of causation, but the court held that each of them failed. The first theory -- that physicians' reliance upon Pfizer's alleged misrepresentations about the safety and efficacy of its medicine caused the TPPs' injury -- failed because:
Plaintiffs do not explicitly allege that physicians in fact relied on Defendant's misrepresentations.
Plaintiffs do not cite a single instance in which a physician received the fraudulent information and decided to prescribe Lipitor based on the information she received. Plaintiffs do not even explicitly allege the more general claim that physicians in general relied on Defendant's misrepresentations.
Slip op. at 16.
The second causation theory floated by Plaintiffs was that pharmacy benefit managers relied on the Defendant's alleged misrepresentations, which caused the TPPs' injuries. But again, the court looked to the Complaint to see that it did not alleged that the pharmacy benefit managers in fact relied on misrepresentations "regarding the cost effectiveness, efficacy, or safety of Lipitor when [they] decided to include Lipitor on the recommended formularies. In addition, Plaintiffs do not specifically allege that Plaintiffs used formularies that were developed by [pharmacy benefit managers]." Slip op. at 17.
The court gave short shrift to Plaintiffs' third causation theory that their injuries were caused by their reliance on the Defendant's statement on its website that it was marketing Lipitor lawfully. The website statement was not substantive information about Lipitor and could not have affected the TPPs' assessment of Lipitor's "value, efficacy, and safety." Id. at 18. And although the TPPs might have been able to give doctors information to counter the Defendant's representations if they had known it was not marketing to physicians lawfully, even that theory requires an underlying allegation that the doctors were relying on the Defendant's alleged misrepresentations, which the Complaint did not contain. Judge Wood distinguished the case upon which the Plaintiffs relied -- Desiano v. Warner-Lambert Co., 326 F.3d 339 (2d Cir. 2003) -- because it involved an underlying misrepresentation to TPPs about the safety of a drug. Here, however, the underlying misrepresentation arguably was "a single, very general misrepresentation on [a] website [that Defendant's] advertising campaign was lawful, when it was not." Slip op. at 19.
As for the state law claims, the court held that plaintiffs lack Article III standing to bring the claims because they do not expressly allege causation. Nevertheless, it gave plaintiffs leave to replead all except the following:
- Ohio Consumer Sales Practices Act -- because TPPs are not natural persons who can engage in consumer transactions under the Act.
- Texas Deceptive Trade Practices Act -- because TPPs are not consumers under the DTPA because they do not "use" the goods they buy.
- New Jersey Consumer Fraud Act -- because TPPs are not consumers under the CFA because they do not "use" the goods they buy.
- Illinois Negligent Misrepresentation -- because the economic loss doctrine precludes the TPPs' claims.
- Ohio Negligent Misrepresentation -- because the cause of action applies only to those in the business of supplying information, not tangible products.
- Indiana Negligent Misrepresentation -- because the cause of action is viable only in the context of an employer-employee relationship.
By the way, the post on this case over at Herrmann and Beck's Drug and Device Law Blog has a number of links to their excellent prior posts addressing the problems with third party payor class actions. Be sure to check it out.
