TPPs Fail to Put Their Money Where Their (Litigation) Mouth Is and Lose
Eric Alexander
In third party payor litigation over prescription medical products, we have often marveled at the causation arguments that plaintiffs have offered and the willingness of some courts to accept collective proof over what really should involve individualized proof. Like here, here and here. (This same dynamic plays out when governmental entities seek reimbursement for such products too.) Usually, though, the plaintiffs allege that the manufacturer’s fraud—under whatever particular statutes or headings it is pursued—was unknown to them during the time for which they seek damages for amounts paid for the product and that the damages stopped once they found out. In Teamsters Local 237 Welfare Fund v. Astra-Zeneca Pharms. LP, No. 415, 2015, 2016 Del. LEXIS 236 (Del. Apr. 12, 2016), the plaintiff payors were undone by their concession that they knew about the alleged fraud and kept paying for the drug at issue anyway. Based on its self-described common sense analysis, the Delaware Supreme Court affirmed the dismissal for lack of causation without weighing in on the Superior Court’s rejection of causation where individual physicians made individual decisions about what to prescribe. This is a good result, but we are concerned about the implications for the practices of payors who seem increasingly interested in signing up with contingency fee lawyers to sue medical product manufacturers. (In case you were wondering, that was a teaser, designed to get you to read all the way to the end of the post.)
The basic facts are that the plaintiff filed a purported nationwide class action on behalf of third-party payors in Delaware state court in 2004, alleging that the defendant violated state consumer fraud laws by falsely marketing Nexium as being more effective than Prilosec, an older product with allegedly one-half of the same active ingredient per dose. Adding some facts omitted in the opinion, the initial NDA for Prilosec had been approved in 1989 (under the name Losec) and lost exclusivity in 2001, around which time FDA approved the NDA for Nexium, which had an enantiomer (here, the left hand chiral image) of the Prilosec’s active ingredient as its active ingredient. The indications for both drugs were expanded through the years, with Prilosec going over-the-counter in 2015. These drugs together accounted for a large chunk of the prescriptions written for heartburn, gastroesophageal reflux disease, and related complaints. Plaintiffs claimed that the development of Nexium and the marketing campaign after its introduction were designed to get the defendant paid a high price for its newer branded product instead of money going to pay for cheaper generic versions of the older product. They claimed they had been harmed by paying for the Nexium prescribed by physicians for the patients participating in their plans. The same group of lawyers apparently filed other “essentially identical class actions” with different sets of named plaintiffs, including one in Delaware federal court that resulted in the dismissal of a New York consumer fraud claim. Ignoring some history and details much like the plaintiffs ignored the marketing for Prilosec over the last fifteen years and the difference between a racemic mixture and an enantiomer, the Delaware state court action woke up from a long slumber in 2014 with its second amended complaint asserting the same claims the federal court had disposed of a few years before.
The Superior Court first determined that the law of New York, where the named plaintiffs were based, applied instead of the law of Delaware, where the defendant was based, or the laws of thirteen other states. Id. at *9. The court found that plaintiffs had not alleged the causation required for a consumer fraud claim: the “purported chain of causation that runs from the allegedly deceptive advertisements that may have influenced the decisions of individual doctors to prescribe a drug to their patients to causally affect the payer unions in this case is simply too attenuated,” as the doctors would be “presumed to go beyond advertising medium and use their independent knowledge in making medical decisions.” Id. at **9-10. We certainly like this reasoning, which would apply to a bunch of these cases. We also like that the court did not give plaintiffs a fourth chance to frame a complaint that stated a claim.
On appeal, the Delaware Supreme Court took a different tack. First, it decided that it did not have to choose between New York and Delaware law, as each had a similar causation requirement in its consumer fraud law. New York’s clearly required a showing of causation, because the statute authorized suit by “any person who has been injured by reason of any violation of this section.” Id. at *12. In Delaware, the statute did not have an express causation requirement and allowed a violation without a showing of reliance. Id. at **10-14. It did, however, only authorize private suits by a “victim of a violation.” The court’s common sense interpretation, informed by common law fraud, was that “the violation must have ‘caused’ harm to the person bringing the action for violation of the act, or the person would not be a ‘victim.’” Id. at *13. That makes sense to us and allowed the court to address the adequacy of pleading under both New York and Delaware law.
When it did, it chose not to address the Superior Court’s reasoning or “the lively debate about the scope of causation and its interplay with state consumer fraud statutes” given the role of physicians as prescribers of the products at issue. Id. at *17.
Instead, we rely on the common sense notion that TPPs who claim that false advertising injured them, but continue to cover the allegedly falsely advertised drug on their formularies and reimburse members for prescriptions cannot, as a matter of law, establish that they were “injured by reason of” or were victims of the false advertising.
Id. Plaintiffs had conceded at oral argument below that they continued to pay for Nexium even after discovering that it was a “fraudulent product.” Id. at n.33. The three complaints had presumably been silent on this, but they had made clear that they were aware of the “full scope of the alleged fraud,” which distinguished this from cases where plaintiffs got past motions to dismiss based on selective pleading about what they knew while paying for the product at issue. Id. at n.34. There is perverse incentive for plaintiffs in these cases to omit facts that would foreclose causation, when they should have to make factual allegations about what they knew and what their behavior was to state a claim for consumer fraud. The Teamsters plaintiffs, in part because of the questioning of the court below, admitted enough so that it was apparent that “[t]hey were injured by their own conduct,” not the defendant’s. Id. at *19.
Plaintiffs’ remaining arguments for why they were harmed even though they each decided to keep paying for Nexium prescriptions were rejected. Plaintiffs first offered a fraud on the market theory, claiming the “market” price of Nexium was inflated (kindof like we addressed here). “No ‘market’ in the traditional economic sense exists to set a price for prescription drugs—pharmaceutical companies set prices in a heavily regulated environment with little interplay between the laws of supply and demand,” making any claim that the “market” price has been depressed speculative. Id. at *21. In addition, because “the TPPs elected to continue covering Nexium fully aware of their false advertising claims[, to] recognize fraud on the market theory in the present context would ignore the TPPs culpability for their self-inflicted wound.” Id. Plaintiffs’ last argument was that the defendant’s advertising somehow forced them to pay for Nexium. The court’s rejection of this is as contrary to business realities is best read in full:
Their argument is particularly unpersuasive given the role of TPPs in the healthcare system, a large part of which is cost control. TPPs are structured to counter pharmaceutical company pressure on physicians and patients to prescribe and to use more expensive branded drugs where generics will do. TPPs can incent physician and patient behavior by not listing a drug on their formularies, or by offering financial incentives to use less expensive and equally effective generic medicines. The TPPs chose not to do so here while fully aware of their false advertising claims. That was their business decision to make. But they cannot then recover damages under either consumer fraud statute for the harm they inflicted on themselves.
Id. at *23. So, the dismissal without leave to amend was affirmed in a decision providing plenty of ammunition to fend off similar suits.
Aside from the incentive to plead in a way that makes it looks like plaintiffs might be able to prove causation even for dubious reimbursement claims, there is another potential incentive here. As we have noted, there has been a spate of third party payor litigation over the last decade or so and the dynamic seems be that plaintiff firms identify target defendants and then trawl for “injured” payers to represent. Often, the same sort of newsworthy developments that spawn product liability litigation—like major labeling changes, recalls or market withdrawals, or new studies on risk or efficacy—give rise to third party payor suits claiming damages before the news. We cannot presume to know everything that affects what drugs are listed on the TPP’s formularies, what they pay, when they encourage a branded drug over another, or when they encourage generics over branded drugs, but it would be a shame if decisions about prescription drug benefits were influenced by the prospect of future litigation. If, at the first sign of an issue with a marketed drug, the response of a litigation-conscious TPP is to pull it from the formulary, then the benefits and potentially health of participating patients whose doctors still prescribe them the drug may suffer. That would be bad for patients, but it could also give rise to suits against the TPPs—particularly if a number seem to act in concert—for wrongfully limiting their benefits. The same plaintiff firms might even trawl for suits against the TPPs.