Last Friday, we promised you more on the Second Circuit’s reversal of Judge Weinstein’s Zyprexa class certification decision. Well, here’s more (and the Westlaw cite to boot).
First, the background: A bunch of third-party payors (“TPP”) sued Eli Lilly and Company, claiming that Lilly had misrepresented Zyprexa’s efficacy and side effects. UFCW Local 1776 and Participating Health and Welfare Fund v. Eli Lilly and Company, __ F.3d __, 2010 WL 3516183 (2d Cir. Sept. 10, 2010) (we're just going to call it Zyprexa). These TPPs claimed the misrepresentations harmed them in two ways: (1) causing them to pay a “higher price” than would have been charged absent the alleged misrepresentations (the “excess price theory”); and (2) causing them to pay for off-label Zyprexa prescriptions that would not have been written “but for the alleged misrepresentations” (the “quantity effect theory,” which sounds like it may also be the title of a schlocky sci-fi show). Id. at *1.
The TPPs filed a putative class action on behalf of a nationwide class of TPPs, asserting civil RICO and state consumer protection claims, along with the usual fraud and unjust enrichment tag-alongs. Id. at *6. The plaintiffs moved for class certification, Lilly moved for summary judgment, and Judge Weinstein denied the SJ (or else we wouldn't be here) and certified a class of TPPs – limited to (a) the RICO claims; and (b) the “excess price theory.” Id. at *7. The writing was on the wall when Judge Weinstein denied summary judgment, finding Lilly’s alleged scheme was “broadbased” and thus it was possible to prove reliance by “aggregate proof.” Id. When a judge wipes out a major, major individual issue with the wave of the aggregate proof wand, it spells trouble for the class action defendant. You might be asking yourself, isn’t “aggregate proof” the same thing as “fraud on the market” – a theory that was rejected when the Second Circuit overturned … you guessed it … Judge Weinstein’s class certification decision in McLaughlin v. Am. Tobacco Co., 522 F.3d 215 (2d Cir. 2008)? Well, not according to Judge Weinstein, who believed that reliance could be proven classwide by “generalized proof” (as opposed to the “more abstract” fraud on the market theory) because the alleged fraud was “‘directed through mailings and otherwise at doctors who relied, causing damages in overpayments by plaintiffs.’” Zyprexa, 2010 WL 3516183, at *8 (quoting district court). So there you have it – wipe out reliance, and, Judge Weinstein concluded, “‘the only difference among class third-party payors is how much of the total overcharge each shall receive in damages.’” Id. (quoting district court again).
The Second Circuit’s reversal began with a question that’s been getting a lot of play in RICO-land lately: does RICO’s causation element – requiring proof that the injury was caused “by reason of” the RICO violation – necessarily require proof of reliance? After Bridge v. Phoenix Bond & Indemnity Co., 128 S.Ct. 2131 (2008), which we blogged about here, we know that RICO doesn’t require “first-person reliance,” i.e., reliance by the plaintiff on the alleged fraud. Zyprexa, 2010 WL 3516183, at *10. The Bridge Court went on, however, to say that “[i]n most cases, the plaintiff will not be able to establish even but-for causation if no one relied on the misrepresentation.” Bridge, 128 S.Ct. at 2144. Relying on Bridge, the Zyprexa plaintiffs put their thumb over that quote and instead argued that there is “no reliance requirement under RICO.” Zyprexa, 2010 WL 3516183, at *10. The Second Circuit was able to sidestep that question, because “in this case the plaintiffs allege, and must prove, third-party reliance as part of their chain of causation. Plaintiffs allege an injury that is caused by physicians relying on Lilly’s misrepresentations and prescribing Zyprexa accordingly.” Id. (emphasis added). So in the end, the Zyprexa court left for another day, and a braver set of plaintiffs, the question of whether a plaintiff can make out a RICO claim without alleging reliance by anyone.
Having resolved that the TPPs had to prove up their reliance allegations, the court went on to determine whether reliance could be proven with “generalized” proof, or whether it required individualized proof (which would kill the class). The court first looked at the causation/damages theory Judge Weinstein had certified – the “excess price” theory. And now is a good time to plug this opinion for its discussion on pharmaceutical pricing. It will surely come in handy down the road the next time some crazy TPP thinks it can get a class certified in of these cases, and it also served as the backbone for the class certification reversal here. For example:
(1) The market for pharmaceuticals is generally “inelastic.” That means that changes in price usually won’t significantly impact demand. Zyprexa, 2010 WL 3516183, at *3. When a brand-name product is first introduced, the price is typically “sticky,” which means price does not respond to market demand. Id.
(2) “A drug company may even increase the price of a drug when it is expected that negative information will lower the demand, so that the price increase will compensate for the decrease in quantities sold and the overall profits of the company will not fall.” Id. at *3 (emphasis added).
(3) “[I]n the market for prescription drugs three sets of price negotiations exist: (1) retail pharmacies and nonretail providers negotiate with pharmaceutical manufacturers and wholesalers; (2) payors (often through PBMs [Pharmacy Benefits Managers]) negotiate with pharmaceutical manufacturers and wholesalers; and (3) payors negotiate with retail pharmacies and nonretail providers.” Id. at *4 (quoting district court). Notably absent? The doctors, who “generally do not take the price of a drug into account when deciding among treatment options.” Id.
(4) And just to throw another monkey-wrench in the causal chain: “[I]n practice, TPPs rarely modify the recommendations of their PBMs. On the rare occasions when a TPP customizes its formulary, it generally does so in consultation with the PBM’s Pharmacy and Therapeutics Committee.” Id. at *4.
Going back to the TPP’s “excess price theory,” it is easy to see how these basics of pharmaceutical pricing doomed the plaintiffs’ attempt to prove causation on a classwide basis. For starters, because prescribers don’t typically consider price when making prescribing decisions, “[a]ny reliance by doctors on misrepresentations as to the efficacy and side effects of a drug, therefore, was not a but-for cause of the price that TPPs ultimately paid for each prescription.” Id. at *11.
Moving to proximate cause, TPPs were equally out of luck. TPPs’ “causal chain” – Lilly distributes misinformation, docs rely on that misinformation and prescribe, TPPs overpay – “skips several steps and obscures the more attenuated link between the alleged misrepresentations made to doctors and the ultimate injury to TPPs.” Id. at *12. So what does the real chain look like? (1) Lilly distributes misinformation, (2) docs rely on misinformation, (3) TPPs rely on PBMs and (4) Pharmacy and Therapeutics (P&T) Committees who put Zyprexa on formularies, (5) TPPs fail to negotiate price with Lilly, (6) TPPs overpay. Id. Got that? This isn’t Tinker to Evers to Chance; it’s more like “Who’s on First.” There are an awful lot of “independent actions” buried in that chain, from doctors to PBMs to P&Ts. Id. Those independent decisions alone kill the proximate cause proof.
Beyond that, the TPPs did themselves no favors; they were the only ones in a position to negotiate price, yet they didn’t allege they directly relied on Lilly’s misrepresentations before paying the price they paid for Zyprexa. Equally important, the TPPs’ conduct demonstrated why “generalized proof” of proximate causation was impossible – most TPPs didn’t negotiate price with Lilly, and even after the alleged “truth” was known, most TPPs continued to pay full price, while others requested rebates from Lilly, or restricted their formularies. Id. These individualized reactions to the alleged fraud underscored that proximate causation couldn’t be proven on a classwide basis – at least on the “excess price theory.”
The court then shredded the “quantity effect theory” for good measure, even though the plaintiffs abandoned the theory at the district court level and thus the class certification related only to the “excess price theory.” Id. at *12. The Second Circuit could have just held the claim abandoned and ended there, but instead it discussed the flaws in the “quantity effect theory” (probably to avoid the plaintiffs running back to Judge Weinstein and renewing their class certification motion on this theory). In order to prove up this “volume” theory, the plaintiffs’ expert assumed that, but-for the alleged off-label fraud, sales would never have risen above the volume of Zyprexa sold in 2006. Under this theory, every prescription above this 2006 level was an “excess” prescription that occurred because of the fraud. Id. at *13.
The court conceded that taking price out of the mix made the causal chain simpler, but it still wasn’t susceptible to generalized proof. Why? Those pesky doctors and their independent medical judgments again. The plaintiffs argued in effect that Lilly so tainted the information environment with its “pervasive” marketing plan that generalized proof of causation was possible. The court disagreed: “Lilly was not, however, the only source of information on which doctors based prescribing decisions. An individual patient’s diagnosis, past and current medications being taken by the patient, the physician’s own experience with prescribing Zyprexa, and the physician’s knowledge regarding the side effects of Zyprexa are all considerations that would have been taken into account in addition to the alleged misrepresentations distributed by Lilly.” Id.
The plaintiffs also had a “substitution” problem – in other words, what if they were right and a whole slew of Zyprexa was prescribed only because of the alleged fraud? How would they prove what treatment option (or options) would have been substituted in this but-for world, and how much those substitutions would have cost? Of course, the easy answer is to say simply that in the absence of Zyprexa, the patients would have received no alternative treatment. But “[p]laintiffs have not presented any evidence to show that, had Zyprexa not been prescribed, no medication would have been prescribed, nor that possible alternatives, such as antidepressants, would have been less expensive than Zyprexa.” Id. In fact, given that TPPs are differently situated, with different patient demographics, and that TPPs continue to pay for Zyprexa and for the most part do not closely monitor the prescriptions to determine whether they are off-label or not, proving up the hypothetical “lower-cost” (or “no-cost”) substitute is impossible to do on a classwide basis. Id. It’s tough for plaintiffs when real life gets in the way of theory.
Having blown out the class, the Second Circuit turned finally to Judge Weinstein’s denial of summary judgment. The court vacated that ruling on the merits, reiterating that the “excess price theory” was too attenuated to state a RICO claim, but remanding to determine whether the plaintiffs’ “quantity effect theory” has any legs for certain individual plaintiffs. Putting aside the economics of individual TPPs going it alone on this flimsy shell of a case, it seems like any brave plaintiffs that do decide to pursue the “quantity effect” claim further will run into the same causation problems outlined by the Second Circuit – including, most importantly, the individual prescribing decisions of those independent actors, the prescribing physicians, which sever the causal link. And we’re willing to bet that even if an individual TPP figured out a way around that problem, that plaintiff’s damages would be non-existent given the “substitution” problem and the high likelihood that the TPP continues to reimburse for all Zyprexa prescriptions, “off-label” or not, to this day.