Tuesday, October 07, 2008

Grouping prevails in multistate consumer class action

In re Pharmaceutical Industry Average Wholesale Price Litigation, --- F.Supp.2d ----, 2008 WL 4368945 (D. Mass.)

A rare victory for consumer protection class actions, accepting subclasses. Here’s the opinion from the benchmark bench trial finding liability under Massachusetts consumer protection law. (It seems quite obvious that the court’s initial finding of liability is important in certifying the class; the court is convinced that there is a wrong here, and denying a remedy is harder under those circumstances.) Here’s the FAQ from a website dedicated to the litigation. Here’s an AstraZeneca website about the related consumer settlement over Zoladex.

Plaintiffs moved to certify two nationwide classes under more than thirty state consumer protection laws. The basic claim, in extremely simplified form: drugmakers AstraZeneca and BMS “grossly inflated” the prices of certain doctor-administered drugs by misstating their Average Wholesale Prices (AWPs) in industry publications. Because insurance and Medicare reimbursement was based on AWPs, doctors could make a lot of money by prescribing the right drugs, pocketing the difference between the AWP and what they actually paid. Drug companies therefore manipulated and “marketed the spread” to influence doctors’ decisions, while successfully insisting that their contracts with doctors remain confidential. Doctors apparently sometimes said that AWP stood for “ain’t what’s paid.”

Not only did this stiff the reimbursers, it meant that doctors had distorted incentives in making what one might think ought to have been purely medical decisions, and the drug companies knew it. Given the serious conditions treated by the drugs at issue, including cancer, patients were unlikely to ask for different drugs or to switch doctors based on copayment costs, further reducing price-based competition. Even once reimbursers eventually learned that AWPs bore little relationship to actual prices, regulations and laws specifying use of AWP took time to change, meaning that the distorted payments continued for a while.

Though the published AWPs were fictitious, most knowledgeable insiders knew this. Some spread was generally considered tolerable as compensation for underpayments to physicians for other services. Plaintiffs’ expert at the bellwether trial concluded that a spread of more than 30% was unreasonable, and a number of the drugs at issue exceeded that spread—one BMS spread was over 1100%.

The two classes at issue were (1) the Third-Party Payor MediGap Supplemental Insurance Class (the “Medigap Class”), under 31 states’ laws; and (2) the Consumer and Third-Party Payor Class for Medicare Part B Drugs Outside of the Medicare Context (the “Non-Medicare Class”) under 39 state’s laws. The court certified (1) and certified (2) for claims under statutes that didn’t require proof of reliance. This corresponded with the Massachusetts classes certified for the bellwether trial, which resulted in victory for plaintiffs (on appeal).

At the bellwether trial, the court found that AstraZeneca’s published AWP for Zoladex was inflated by from 40-169%, and that this was unfair and deceptive. Similarly, it found liability for BMS for five drugs (out of six at issue). The “mega-spreads” of several hundred percent and more were “shocking” and on their own showed unfairness and deception sufficient to impose liability under Massachusetts law. The court found scienter: defendants knew that third-party payors and the government didn’t understand the extent of the mega-spreads between AWPs and true costs, and they also knew that laws and contracts locked the payors into an AWP-based payment scheme. Further, they knew the “devastating impact” the mega-spreads had on “old and sick patients required to make co-payments they could ill afford.” They helped some needy patients with subsidies. But they didn’t give a damn about the spiraling drug costs to the third-party payors and the government.

Class certification requires (1) numerosity; (2) common questions of law or fact; (3) typicality; (4) adequate representation. Rule 23(b)(3) certification further requires the court to find that common questions predominate and that a class action is superior to the alternatives. Courts are encouraged to conduct rigorous inquiries into these issues, as the court did in conducting the bellwether trial—along with presiding for seven years over this multi-district litigation. It was thus in a good position to predict how key issues would play out.

Defendants argued that (1) differences in state consumer protection statutes would make managing a class action overwhelmingly difficult; (2) these same differences prevent a finding of predominance; and (3) the claims involve individualized determinations on scienter, reliance, causation and damages.

Plaintiffs proposed to create a common denominator standard for the various state laws, a sort of Esperanto: an intent to deceive jury instruction requiring plaintiffs to prove fraud, which they argued would constitute a violation of most, if not all, state unfair trade practice standards. The fate of Esperanto was the fate of this proposal (minus William Shatner).

The court agreed that garden-variety fraud would violate most state consumer protection laws, and found it a tempting idea. But defendants argued that this would violate the due process rights of absent class members who could recover under less stringent standards. (Yeah, I’m sure defendants are really concerned about those absent class members. And I’m sure it’s really a plausible alternative to have thousands of individual lawsuits.) The court agreed that due process required attention to varying state standards. This is not an academic dispute, because in the bellwether trial plaintiffs proved deception only in some years, while prevailing more broadly under the unfairness standard.

In the alternative, plaintiffs proposed grouping to deal with state-law differences on particular matters. As the court noted, “[w]hile numerous courts have talked-the-talk that grouping of multiple state laws is lawful and possible, very few courts have walked the grouping walk.” It’s plaintiffs’ burden to show how grouping would work.

Here, the relevant laws are little FTC acts, which usually follow one of three statutory models: (1) a prohibition of unfair methods of competition and unfair/deceptive acts or practices; (2) a ban on “false, misleading, or deceptive acts or practices”; and (3) a list of specific trade practices deemed unlawful. Twenty-six states defer to FTC interpretations of the FTCA. Plaintiffs proposed eight groups of states. The court accepted three, and excluded some states with unique laws (Indiana and Wisconsin), but held open the possibility of certifying a separate statewide class and remanding to the appropriate district court.

Then, despite the similarity of language in the groups, defendants argued that state-by-state interpretive differences required rejection of the class. Reliance: many state laws require reliance, and third-party payors had different levels of knowledge and sophistication with respect to AWP. Thus, individual fact issues would predominate in states where plaintiffs are required to establish reliance. In fraud cases, many courts have rejected class actions on this ground. For the Medigap class, this was all beside the point, because the third-party payors were contractually required to pay all or part of a Medicare beneficiary’s copayment, which was statutorily based on the AWP: reliance is contractual and knowledge is irrelevant.

For the non-Medicare class, the reliance analysis is different. Based on the bellwether trial, the court found that the typical third-party payor didn’t know about the existence of the mega-spreads because manufacturers took careful steps to preserve the secrecy of the spreads. But information began to spread, and the typical third-party payor did know by 2001. Between then, knowledge varied significantly. Thus, the court declined to certify the non-Medicare class under the laws of states requiring reliance. (And only consumer members of the proposed class were allowed under Michigan and Missouri laws, because those states don’t cover purchases for business/commercial purposes; the same is true in Oregon, but Oregon consumers were also excluded because of that state’s reliance requirement.) The court identified a number of states where reliance is not required, including states in which a general showing that a reasonable consumer would have relied on the representation suffices without individualized showings of reliance. Because California law is in a state of flux, the court declined to certify the non-Medicare class under California law.

Defendants also argued that scienter requirements vary, implicating predominance and manageability. However, most of the variance centers around the scienter requirement for omissions. Plaintiffs have two theories: knowing and intentionally false misrepresentations of AWP, and unfair creation of mega-spreads. Thus, the varying standards do not pose insuperable management issues; the court can ask the jury specific questions.

Punitives: The standards have similar wording (and in fact are increasingly constitutionalized) and should not cause jury instruction problems.

Causation: Defendants argued that individualized fact issues predominate in causation analysis, given that many third-party payor learned that AWPs were false but nonetheless continued to use them as a benchmark. Blue Cross Blue Shield of Massachusetts, for example, continued to use AWP as its pricing benchmark even after Congress abandoned it for Medicare. It was worried that it would either lose network providers or push patients into more-expensive hospitals if it pressed for lower AWPs on doctor-administered drugs.

For the Medigap class, contractual obligation also removes individual factual issues on causation/knowledge. For the non-Medicare class, the argument had more force. However, the court concluded that defendants were conflating reliance with causation. The undisputed evidence was that, before 2005, third-party payors didn’t have access to the confidential pricing data necessary to calculate an alternative price even if they knew about the spread. Thus, knowledge wouldn’t have allowed them to change the price unilaterally. Medicare itself took 3 years to develop an alternative because of the complexity of simultaneously increasing prices for doctors’ services. If AWPs had been lower, plaintiffs in both classes would foreseeably have paid less. Thus, individualized fact issues on causation do not predominate.

Defendants argued that the states vary substantially in statutes of limitations, and their interpretations of the discovery rule, fraudulent concealment, equitable tolling, and equitable estoppel. This could be important because the most sophisticated third-party payors should have known about the pricing issues by 1997; the court looked at the effect on states with longer statutes of limitations than Massachusetts’ four years. The court agreed that separate trials would be necessary for third-party payors with special knowledge (those that operated an HMO or specialty pharmacy) in order to determine when the statue of limitations began running; such issues “took a huge amount of time and resources during the bellwether trial.” Thus, the court declined to certify classes for time periods beyond the relevant state statutes of limitations.

Defendants also asserted other possible affirmative defenses, but the court found them “poorly brief[ed].”

Defendants also argued that damages would be individualized, but the court considered that a “red herring,” because AWP was virtually universal. Atypical exceptions could be carved out individually if necessary; individuating damages is rarely determinative where liability is subject to common proof.

With all that out of the way, commonality and numerosity were easy (there are more than 11,000 third-party payors nationwide, plus consumers). Typicality and adequacy were also present, though the court did dismiss certain representatives on individual grounds. The court found that the common issues predominated, and that class treatment was superior to the alternatives. With respect to the “extent and nature” of the litigation, the court described this case as “the seven years’ war.” It’s “hard-fought, costly multidistric litigation” involving “a highly complex system for reimbursement for drugs and some of the finest lawyers in the country.” The court now has unique experience with “these Kafka-esque and opaque drug pricing issues.” A national class action is superior to dividing up this “monster” case and certifying thirty-plus separate class actions, which would require the same plaintiffs, defendants, experts and fact witnesses to traipse all over the country trying the same issues under substantially similar standards.

Another consideration was class members’ interests in individually controlling the prosecution of separate actions. The approximately 11,000 third-party payors include many small plans without the resources to litigate. There are some big third-party payors like Aetna, Cigna, and BC/BS, but in the court’s experience with this and other litigation, those third-party payors that prefer to control their own litigation tend to opt out and litigate or settle independently, leaving the smaller plaintiffs to fend for themselves.

Nonetheless, the court conceded that manageability will be difficult and that reasonable minds could differ about the carve-up-the-monster option, allowing individual federal judges to interpret the law of their host states. But, having closely studied the statutes and gained an understanding of the factual issues, the court still concluded that a multi-state class action was superior.

Finally, defendant AstraZeneca raised a 7th Amendment challenge to the bellwether trial methodology, which the court adopted after denying without prejudice plaintiffs’ motion to certify national classes. AZ argued that if the national class were certifiable in 2005, then denying certification but conducting a bellwether trial “structurally infringed” on AZ’s right to have a jury’s factual determinations control the Massachusetts class action.

The court called this argument “fundamentally flawed.” Given that the Massachusetts law provides equitable relief, it’s well established that the judge can find facts. Moreover, the Manual for Complex Litigation supports the idea of bellwether trials.

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