Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

A number of prominent, scholarly people keep trying to explain why aggregate proof of causation should be allowed in order to facilitate class action litigation.  Judge Jack B. Weinstein has done it in his opinions.  Professor Sam Issacharoff has written about it.  And many deans of the plaintiffs' bar have argued for it.

But nobody has been able to explain to my satisfaction how one uses Rule 23 -- which is not supposed to (and constitutionally could not) alter the substantive elements of claims or defenses -- to deprive a defendant of the right to challenge each class member on the element of legal causation, where such factual challenge would be possible if the class members sued individually. 

Recently, the Second Circuit took up the question of aggregate proof in a third-party payor case against a pharmaceutical company.  In UFCW Local 1776 v. Eli Lilly & Co., No. 09-0222-cv, Slip op. (2d Cir. Sept. 10, 2010), union health benefit plans and other third-party payors for plan members' prescriptions sued the maker of Zyprexa in a class action lawsuit, alleging RICO violations, common law fraud, unjust enrichment, and violations of state consumer protection statutes.  In a lengthy opinion, Judge Jack B. Weinstein had certified a class of third-party payors on the theory that they had paid a higher price for Zyprexa than they would have if the maker had not allegedly misrepresented certain product risks and promoted the medicine for unapproved uses.  Professor Issacharoff defended the certification on appeal, arguing for aggregate proof of causation.

The Second Circuit reversed, and in doing so, had some important things to say about aggregate proof.  The court noted that the market for prescription medicines involves lots of intermediaries:

[D]irect exchanges between consumers and producers are rare.  An individual patient does not choose what drug to take; she is prescribed a drug by her physician.  Nor does the individual patient always pay directly for that drug.  Rather, a TPP, such as her insurance provider, often pays some or all of the drug's cost.

. . . The [TPP's] formulary is usually managed by a Pharmacy Benefit Manager ("PBM"). . . . Drugs placed on a formulary are approved by the PBM's Pharmacy and Therapeutics Committee, made up of physicians and clinical pharmacists. . . .

[I]n the market for prescription drugs, three sets of price negotiations exist:  "(1) retail pharmacies and nonretail providers negotiate with pharmaceutical managers and wholesalers, (2) payors (often through PBMs) negotiate with pharmaceutical manufacturers and wholesalers, and (3) payors negotiate with retail pharmacies and nonretail providers.  The negotiations over price, moreover, do not intersect with the therapeutic choice of what drug a patient should take, which is a decision made by a physician with only minimal input by her patient or the TPP.

Slip op. at 9-10.

It was precisely because of these intermediaries -- and the independent way in which they make their decisions -- that the court held that "but-for" causation could not be the subject of aggregate proof.  Because doctors consider things other than a manufacturer's statements about the efficacy and side effects of its medicine when they are deciding what medicine to prescribe, reliance could not be presumed for each prescription.  Id. at 26.

The court also rejected plaintiffs' theory of proximate cause -- namely, that because the manufacturer put out alleged misrepresentations, the doctors necessarily relied on them to prescribe more of the medicine and the TPPs paid for it.  The court explained:

This narrative skips several steps and obscures the more attenuated link between the alleged misrepresentations made to doctors and the ultimate injury to the TPPs.  In fact, if plaintiffs' factual allegations are correct, the chain of causation runs as follows:  Lilly distributes misinformation about Zyprexa, physicians rely upon the misinformation and prescribe Zyprexa, TPPs relying on the advice of PBMs and their Pharmacy and Therapeutics Committees place Zyprexa on their formularies as approved drugs, TPPs fail to negotiate the price of Zyprexa below the level set by Lilly, and TPPs overpay for Zyprexa. . . .  [P]hysicians, PBMs, and PBM Pharmacy and Therapeutics Committees all play a role in the chain between Lilly and TPPs.

Id. at 27.

The court also noted that doctors rely on a variety of sources for information about medicines other than the manufacturer, including their own knowledge and experience.  Because it was possible -- indeed, even probable -- "that at least some doctors were not misled by Lilly's alleged misrepresentations" and thus did not fall within plaintiffs' theory, the court concluded that "[t]his makes general proof of but-for causation impossible."

Plaintiffs' counsel keep trying to import the concept of aggregate proof from securities litigation, where the presumption of an efficient market suggests that information that is disclosed about a product necessarily affects its price.  But that is not how the markets for consumer goods work.  Disclosures do not move markets.  People buy consumer goods for a variety of reasons -- even irrational ones.  The Second Circuit stressed that fact in McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008).  And a defendant accused of consumer fraud is allowed to challenge each person's decisionmaking process and to prove that nothing it said harmed the plaintiff.  The fact that it is a class action in which the allegations are made does not change that simple fact. 

Hopefully the recent decision in Local 1776 puts the aggregate proof concept to rest in consumer class actions.  But it probably won't.  My colleagues on the other side of the "v" are creative and indefatigable.  As for me -- I'll keep my focus on the fact that Rule 23 doesn't change the substantive rules, no matter what.  And as long as one can demonstrate independence of thought and action in the consumer marketplace, the concept of "aggregate proof of causation" or a "presumption of reliance" amounts to a change of the substantive rules just to facilitate class certification.  And that's just wrong.

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Continuing that long line of cases rejecting claims by third party payors seeking to recover sums paid for medicines that allegedly were promoted for off-label uses is Southeast Laborers Health & Welfare Fund v. Bayer Corp., Case No. 08-1928-MD-Middlebrooks/Johnson, slip op. (S.D. Fla.) (registration with Law 360 required to access link).  In Southeast Laborers, the trial court had given plaintiff two extra opportunities to plead a claim under RICO or the New Jersey Consumer Fraud Act. 

Plaintiffs alleged that Bayer promoted the $1,000-per-dose drug Trasylol for off-label use in controlling surgical bleeding despite its knowledge that there were cheaper, more effective medicines that presented less risks of kidney damage and other harms.  In the Second Amended Complaint, plaintiff alleged that it "paid enormous sums of money to Bayer that they would not have paid had they been aware that Trasylol was not safer, more efficacious or of greater value than available alternatives that were significantly cheaper," and it "would never have incurred this expense had Bayer been honest about the safety and efficacy of Trasylol."  Slip op. at 10.  

The court held that this failed to plead the necessary proximate causation under RICO because it was tantamount to a "fraud-on-the-market" theory that nearly every court to consider the question has rejected outside of the securities context.  Slip op. at 12.  As the court explained:

Although Plaintiff argues that it had an independent choice of whether or not to pay for Trasylol, it does not explain how/why it made the choice to pay for Trasylol and how/why Bayer's alleged concealment of the dangers of Trasylol led Plaintiff to pay for Trasylol.  Ultimately, Plaintiff has not established a different premise of proximate causation and still has not met the Holmes requirement that it demonstrate a direct relation between its payment for Trasylol and Bayer's alleged fraudulent concealment.

Id. at 13.  The court thus dismissed the RICO claim with prejudice.

For similar reasons, the court dismissed the New Jersey Consumer Fraud Act claim with prejudice, holding that plaintiff had failed to properly allege proximate causation.  Id. at 16 ("Plaintiff has not alleged a premise of proximate causation that is distinguishable from one that relies on a fraud-on-the-market analysis.").  Plaintiff argued that a fraud-on-the-market analysis applies only where a plaintiff argues that the price was inflated by the alleged misrepresentations.  But the court rejected this argument, saying that even where plaintiff alleges that it would not have paid any amount for the medicine and seeks a complete rescission of all sales, this, too, is a fraud-on-the-market analysis that has been rejected repeatedly.  Id.

Plaintiff had added to the Second Amended Complaint express and implied warranty theories.  The court dismissed the express warranty theory without prejudice for plaintiff's failure to identify any affirmation of fact, promise, or description of Trasylol that it had received that had become part of the basis of the bargain.   Id. at 18-19.  The court dismissed the implied warranty claim without prejudice because the complaint did not allege that Trasylol was unfit for the intended purpose of preventing perioperative bleeding.  Id. at 20.

The court dismissed plaintiff's common law fraud and negligent misrepresentation claims with prejudice for failure to identify any reasonable reliance and/or proximate causation.  Id. at 22.

And the court dismissed the unjust enrichment count because such claims generally are "not allowed to proceed where all of the plaintiff's other tort claims have failed because of the remoteness of a plaintiff's injuries from a defendant's wrongdoing.  Id. at 23.

Southeast Laborers joins a growing body of law that prevents remote parties from bringing suits for speculative harm allegedly arising out of hundreds or thousands of individual doctor-patient decisions.

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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.

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