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August 2010 
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American Courts Dismiss Fraud Class Actions Brought By Third Parties Who Paid For Medicines |
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J. Russell Jackson, March 2010 |
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Long ago, when a product malfunctioned in the United States, the manufacturer’s potential product liability typically was measured by how many people were physically injured and how severe their injuries were.
Today, that’s no longer true. Although people with personal injuries may bring individual suits for damages, the manufacturer almost certainly can count on multiple class actions purporting to represent all product purchasers – even purchasers whose products did not malfunction. Typically, these lawsuits claim that the product’s propensity to malfunction means that the entire class of purchasers paid more for the product than it was worth, and they assert a variety of consumer fraud theories.
How did American product liability law arrive at this state of affairs? As product liability law was developing, the United States undertook a reform of its securities laws that made it more difficult to bring securities class actions. Established plaintiffs’ securities law firms had long understood that there was substantial money to be made by aggregating claims in class actions.
And so, as it became more difficult to bring securities class actions, they naturally sought to aggregate product liability claims.
Over time, however, American courts made it plain that product liability cases asserting personal injuries could not be certified as class actions, primarily because causation and liability presented too many individualised issues that could not be tried on a classwide basis. See, e.g., In re Panacryl Sutures Prods. Liab. Cases, 2009 WL 3874347 at *8 - *9 (E.D.N.C. Nov. 13, 2009). Conditions like heart attacks and strokes have many possible causes, and establishing the cause for any one person’s heart attack does nothing to establish the cause of any other class member’s heart attack. See In re Vioxx Prods. Liab. Litig., 239 F.R.D. 450, 461-62 (E.D. La. 2006).
Accordingly, plaintiffs’ counsel started pleading their cases to look more and more like securities fraud classes, using state consumer fraud statutes and the federal organised crime statute, the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1861, et seq. This is particularly true in the pharmaceutical and medical device context. Where the FDA has required the addition of new warnings about a medicine’s potential side effects, or where the manufacturer is alleged to have promoted the medicine for ‘off-label’ uses that the FDA has not approved, plaintiffs’ counsel typically bring lawsuits on behalf of so-called ‘third party payors’ – health and benefit plans and insurers that have paid for all or part of the plan members’ prescriptions. Often plaintiffs’ counsel already have a relationship with such health and benefit plans because they represent them in securities cases.
Fraud cases, of course, require reliance on a misrepresentation or – as some state consumer fraud acts define it – the misrepresentation must have ‘caused’ the injury. In securities cases, plaintiffs often benefit from a presumption that the entire class relied on a misrepresentation. Such a presumption is premised on the notion that the market for securities is ‘efficient’ in that it processes new information immediately and factors it into the price of the security. See, e.g., Southeast Laborers Health & Welfare Fund v. Bayer Corp., 655 F. Supp. 2d 1270, 1283 (S.D. Fla. 2009).
In pharmaceutical and medical device cases, third party payors (TPPs) have tried to argue that the same presumption of reliance should apply when they allege that the manufacturer misled the entire medical profession and third party payors. In re Zyprexa Prods. Liab. Litig., 253 F.R.D. 69, 190 (E.D.N.Y. 2008), currently on appeal to the 2d Circuit. But courts typically have refused to impose such a ‘fraud on the market’ presumption of reliance, recognising that purchasers of medicines are not ‘efficient’ processors of information and that doctors prescribe medicines based on many things, including their own personal experience prescribing them. See, e.g., Int’l Union of Operating Engineers Local 68 Welfare Fund v. Merck & Co., 929 A.2d 1076, 1088 (N.J. 2007) (reversing certification of class of third party payors in Vioxx litigation).
Manufacturers faced with claims brought by third party payors have successfully asserted a number of defences in the United States. First, many defendants have had lawsuits dismissed for failure to plead fraud with the particularity required by Federal Rule of Civil Procedure 9(b). For example, in In re Epogen and Aranesp Off-Label Marketing and Sales Practices Litigation, 2009 WL 1703285 (C.D. Cal. June 17, 2009), appeal pending, the court dismissed the TPPs’ complaint. Although plaintiffs alleged that the defendant promoted the medicines for ‘off-label’ uses that were not approved by the FDA, the law allows doctors to prescribe for ‘off-label’ uses, and mere promotion of such uses is not fraudulent. It may violate FDA regulations, but the court held that there is no private right of action that would allow plaintiffs to enforce those regulations. Id. at *6 - *7. Because plaintiffs could not specify the ‘who, what, when, and where’ of the defendant’s statements and detail how, exactly, they were fraudulent, plaintiffs’ complaint was dismissed.
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