In an opinion posted today on the website of the New Jersey Courts system, the New Jersey Supreme Court refused to allow a class action lawsuit to go forward against Merck, the maker of the withdrawn arthritis drug Vioxx. The lawsuit, International Union of Operating Engineers Local 68 Welfare Fund v. Merck was brought on behalf of a nationwide class of “third party payors” (health plans, union health & welfare funds, self-insured employers, and others) and alleged that Merck’s deception and concealment of information about the cardiovascular dangers of Vioxx caused these third party payors (TPPs) to pay for Vioxx when they would not otherwise have paid for it, and to pay inflated prices for it as well.
In July 2005, the Law Division, which was hearing the case, agreed to certify a nationwide class of TPPs that paid for Vioxx. “Class Certification” is the stage at which a Court decides whether to allow a lawsuit to proceed as a class action, on behalf of a large group of individuals or entities. Merck appealed the Law Division’s decision, and the Appellate Division upheld the certification of the class of TPPs. (PAL and several PAL members filed amicus curiae (friend of the court) briefs at both of these stages.) Merck appealed to the New Jersey Supreme Court, which held a hearing on the appeal in March 2007. The Court issued its decision today, and reversed the certification of the class.
The decision is significant because so many pharmaceutical companies are based in New Jersey. Thus, many pharmaceutical lawsuits are brought in New Jersey, under New Jersey’s Consumer Fraud Act. (Although now they are primarily brought in federal court, not state court, due to the Class Action Fairness Act of 2005).
The decision was just posted at 10:00 AM this morning. It is available here. What follows are some preliminary thoughts on and reactions to the decision.
In the 29 page opinion, the Court does not really begin its analysis until page 19. Its decision that a class should not be certified primarily rests on what is known as the “predominance” requirement:
“The central question before us, as in Iliadis, is whether the putative class raises “questions of law or fact common to the members of the class [that] predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.” R. 4:32-1(b)(3).” (Decision, p.14)
The Court spends several pages describing how TPPs decide what drugs to include on their list of drugs they will pay, known as “formularies.” It particularly focuses on its conclusion that different TPPs treated Vioxx differently, in terms of coverage, copayments and the like. The Plaintiffs had argued that if Merck had disclosed the negative information about Vioxx, that TPPs would have not covered Vioxx or would have placed greater formulary restrictions on it.
The Court concludes that common questions of law and fact do not predominate, primarily because it rejects the the plaintiffs’ proposed method for calculating “ascertainble loss.” The New Jersey Consumer Fraud Act requires plaintiffs to show:
“(1) unlawful conduct . . . ; (2) an ascertainable loss . . . ; and (3) a causal relationship between the defendants’ unlawful conduct and the plaintiff’s ascertainable loss.” N.J. Citizen Action v. Schering-Plough Corp., 367 N.J. Super. 8, 12-13 (App. Div.), certif. denied, 178 N.J. 249 (2003). (Decision, p. 24)
The plaintiffs had argued that the Court should focus on Merck’s marketing of Vioxx. This argument is essentially that Merck’s deceptive marketing of Vioxx misled all TPPs and affected their decisions to cover Vioxx, regardless of what those specific decisions were. In other words, TPPs paid for Vioxx when they would not have otherwise, or would have on a much more limited basis, because of Merck’s deception. The defendants, by contrast, argued that the individual decisions of each TPP in the class were key to the claims, and thus that individual questions predominate over common ones, since TPPs acted in numerous different ways concering Vioxx. The Court concludes “…the commonality of defendant’s behavior is but a small piece of the required proofs. Standing alone, that evidence suggests that the common fact questions surrounding what defendant knew and when it did would not predominate.” (Decision p.26-27)
What is odd about this conclusion is that it seems to contradict something the Court says earlier in its opinion. Many states’ consumer protection act require that plaintiffs show “reliance,” that is, that they actually relied on the alleged deceptive acts of the plaintiff. NJ’s Consumer Fraud Act, does not require reliance:
“Our CFA does not require proof that a consumer has actually relied on a prohibited act in order to recover. In place of the traditional reliance element of fraud and misrepresentation, we have required that plaintiffs demonstrate that they have sustained an ascertainable loss.” (Decision, p.27)
Yet, by saying that each individual class members’ actions and treatment of Vioxx predominates over Merck’s deceptive marketing campaign, the Court seems to be importing a requirement of reliance. It presumes that each class member’s reaction to the revelations concerning Vioxx is relevant to whether or not the CFA is violated. Yet that is, at its core, a question of reliance, and isn’t relevant here. It also ignores the fact that the Merck’s fraudulent marketing was a baseline for all of the admittedly-diverse decisions of different TPPs on how they would cover Vioxx. It is axiomatic that every TPP would have regarded Vioxx differently, and paid for it differently (if at all), had they been told the truth about it.
On p. 15 of the opinion, the Court lays out its standards for predominance from prior cases:
In Iliadis, supra, we explained the meaning of predominance, referring to the importance of an analysis of “the number, and more important the significance of common questions.” 191 N.J. 108 (citing Carroll, supra, 313 N.J. Super.at 499)…Finally, we noted that “predominance requires, at [a] minimum, a ‘common nucleus of operative facts.’” (Decision, p.15)
The common question of whether Merck deceptively marketed Vioxx is far, far more significant than the “non-common” question of how individual TPPs reacted to that marketing (which arguably, is not relevant at all, because it is a reliance issue.)
The Court then goes on to question the plaintiffs’ proposed method of determining “ascertainable loss:”
“Plaintiff argues that it should be permitted to demonstrate class-wide damages through use of a single expert who would opine about the effect on pricing of the marketing campaign in which defendant engaged. To the extent that that plaintiff intends to rely on a single expert to establish a price effect in place of a demonstration of an ascertainable loss or in place of proof of a causal nexus between defendant’s acts and the claimed damages, however, plaintiff’s proofs would fail. That proof theory would indeed be the equivalent of fraud on the market, a theory we have not extended to CFA claims.” (Decision, p. 29)
There are several problems with this analysis. First, it isn’t much of an analysis — it goes into no detail about why this method would not be adequate. In fact, methods such as this are routinely used in other pharmaceutical class actions. Data concerning insurance coverage for drugs and the amount paid by
third party payors as a group versus individuals making copayments are readily available.
Second, it does not explain why the use of such an expert amounts to a “fraud on the market theory.” It merely states that the plaintiffs’ approach is “fraud on the market” and leaves it at that — no analysis of why this is allegedly so.
Finally, the issue is largely beside the point. It is adequate to show that the members of the class had an ascertainable loss. It is not necessary to show how much that loss was, for purposes of class certification. But that seems to be precisely what the Court is seeking. By concealing vital information about Vioxx’s safety, Merck induced TPPs to cover and pay for Vioxx when they would otherwise not have. The TPPs ascertainable loss is those improper payments. The amount of their ascertainable loss is a question not of liability, but of damages, which was not at issue at this stage of the case.
The last section of the opinion addresses the “superiority” requirement, i.e. that a class action be shown to be superior to other methods of adjudication. The Court’s analysis here ignores key facts. On p.16, the Court says that its superiority analysis:
“demands ‘(1) an informed consideration of alternative available methods of adjudication of each issue, (2) a comparison of the fairness to all whose interests may be involved between such alternative methods and a class action, and (3) a comparison of the efficiency of adjudication of each method.’” …More specifically, in Iliadis, we identified as important to the superiority analysis a consideration of the “class members’ ‘lack of financial wherewithal.’” In such circumstances, we have expressed a concern that, absent a class, the individual class members would not pursue their claims at all, thus demonstrating superiority of the class action mechanism.” (Decision, p.16-17, internal citations omitted)
In its analysis on p.30-32, the Court fundamentally misunderstands the nature of third party payors. It compares this proposed class to a class of individual hourly wage earners in the Iliadis case and concludes that:
“Unlike the individual wage earners there, plaintiff and, by extension, all of the members of the class, allege that they have been damaged in large sums. Unlike those hourly wage earners, plaintiff and the other third-party payors are well-organized institutional entities with considerable resources. Unlike in Iliadis, here we see no disparity in bargaining power and no likelihood that the claims are individually so small that they will not be pursued. In short, we find no ground on which to conclude that this proposed nationwide class meets the test for superiority that we have traditionally required.” (Decision p.31-32)
The question is not whether the class members have been “damaged in large sums,” (and what constitutes large, anyway?) but rather, whether the damages they suffered make an individual lawsuit feasible. Pursuing an individual lawsuit against Merck in this case would be an enormously expensive undertaking. Certainly, large commercial insurers like Aetna, Humana, United Healthcare and even many Blue Cross plans would have the “financial wherewithal” to pursue such cases. But there are tens of thousands of smaller TPPs that would not, including the plaintiff here, IUOE Local 68 Welfare Fund.
The Court had identified on p.16 that an important consideration is “class members’ ‘lack of financial wherewithal.’ In such circumstances, we have expressed a concern that, absent a class, the individual class members would not pursue their claims at all, thus demonstrating superiority of the class action mechanism.” But the Court wrongly concludes that class members here would be able to pursue their claims without a class action. Most of them would not.
While some TPPs are “well-organized institutional entities with considerable resources,” many are not. How could one conclude that a small union health and welfare fund with a few hundred members has “no disparity in bargaining power” with a company like Merck?
The bottom line is that for most TPPs, a class action is the only way they can pursue claims against Merck for its deceptive marketing of Vioxx, a campaign that cost health plans and consumers billions in unnecessary costs, not to mention tens of thousands of heart attacks and deaths.
Today’s decision from the New Jersey Supreme Court is an extremely disappointing one. It ignored key facts about the class and how they were affected by the allegations in the case. Unfortunately, this decision will make it that much harder for health plans to hold drug companies accountable for their illegal tactics. With so many drug companies headquartered in New Jersey, this case will have broad impact.
To read the court’s decision, click here.
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