Supreme Court Observations: AU Optronics Ruling Empowers State Attorney General-Trial Lawyer Alliance

supreme courtCross-posted at WLF’s Forbes.com contributor page

In its unanimous Mississippi ex rel. Hood v. AU Optronics ruling, the Supreme Court on Tuesday refused to interpret the Class Action Fairness Act (CAFA) so as to allow the “mass action” removal of a parens patriae suit in which the State of Mississippi was the only named plaintiff.  The decision marks only the second time that the high court has considered the 2005 statute, which Congress enacted to expand a defendant’s ability to remove to federal court a class action that did not satisfy the traditional requirements of diversity jurisdiction.  (Last term, a unanimous Court in Standard Fire Insurance Co. v. Knowles ruled in favor of removal in a case where the class representative attempted to avoid CAFA jurisdiction by stipulating to damages below the threshold amount in controversy).

Utilizing a “real-parties-in-interest” analysis, the U.S. Court of Appeals for the Fifth Circuit had agreed with the district court that the case constituted a “mass action” under CAFA.  But on the question of the applicability of CAFA’s “general public” exception, the appeals court reversed the district court, which had remanded the case back to state court on the basis that it was “asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class)” under 28 U.S.C §1332(d)(11)(B)(ii)(III).  Oddly, the Supreme Court didn’t bother weighing in on CAFA’s “general public” exception, holding instead that the suit failed even to meet the basic definition of a “mass action” because it did not involve 100 or more named plaintiffs.  The Court rejected the lower courts’ “real-parties-in-interest” approach in favor of a narrow reading of the statutory language.

As a result, state attorneys-general and their trial bar friends are now free to avoid federal court altogether by simply running their class and mass actions through an AG’s office as a parens patriae suit.  The trial lawyers will still receive their big contingent-fee awards, and they can continue to send AGs their out-of-state campaign contributions.  According to a recent report, for example, the Mississippi AG’s “plaintiffs’ firm contributors were all out of state, and they made no contributions to any other candidates for statewide office in Mississippi.”  In only two instances where contingent-fee law firms represented Mississippi in securities fraud class actions did the firms not make a previous contribution to the AG’s campaign.  They did so subsequently, however, according to the report.

If this staggering conflict of interest is ever to be reined in, the Court has left it up to Congress to do so.  That’s a shame, inasmuch as the Supreme Court should take a greater interest in cleaning up practices that treat courtrooms like cash registers and corrode the integrity of the judicial process.

Court Ruling Recalls Injudicious Average Wholesale Price Litigation Crusade

Cross-posted by Forbes.com at WLF’s contributor site

A little over a decade ago, federal regulators and state attorneys general initiated a litigation campaign to alter how government health care programs reimbursed doctors for prescription drugs. Like most “regulation by litigation” efforts, this campaign seized upon laws of broad application such as the False Claims Act (FCA) and encouraged private lawsuits of questionable merit. Government enforcers have long since moved on to other crusades, but as a federal court decision last month reflects, some private suits still drag on, burdening American businesses with needless legal expenses.

AWP. In the early 2000s, the federal government reimbursed health care providers based in part on a drug’s average wholesale price, or “AWP.” Some likened AWP to the sticker price, or MSRP, of a new car: an inflated number which almost no one actually paid. Everyone involved in health care was aware of the illusory nature of AWP, and federal and state regulators urged legislative change, but Congress resisted reform. So unelected officials and their brethren in the plaintiffs’ bar sought to impose change. As this 2002 WLF Working Paper explains, they devised legal theories which branded AWP as an overcharging scheme, and accused drug makers, price publishers, and other entities such as pharmacy benefit managers (PBMs) of perpetrating a fraud. State attorneys general filed billion-dollar fraud actions and plaintiffs’ lawyers teamed up with “whistleblowers” to file qui tam suits under the FCA.

The ensuing litigation crusade provided moderate returns at best to the plaintiffs’ lawyers and state AGs who jumped on board. For instance, in 2009, the Alabama Supreme Court dashed the state’s (and its contingent-fee lawyers’) dreams of a huge payday, dismissing two AWP cases, finding no fraud existed. Continue reading

Parens Patriae?: SCOTUS to Assess States’ Identity as Class Action Litigant in Fall CAFA Case

mississippiGuest Commentary

by Cory Clements, a 2013 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

In their ongoing quest to circumvent the Class Action Fairness Act (CAFA), plaintiffs’ lawyers have increasingly enlisted the aid of sympathetic state Attorney Generals (AG). In order to keep class action (or “mass action”) lawsuits in state court, plaintiffs’ lawyers pitch their ideas to state AGs who in turn bring suit on behalf of the state as parens patriae. This trick works because a suit brought only in the name of an AG on behalf of the state evades federal removal jurisdiction. Historically, because states are not considered “citizens” for purposes of diversity jurisdiction, when a state brings suit against an out-of-state corporation there can be no diversity, which will keep the suit in state court.  But state court judges and juries often are biased against out-of-state interests.  That works out well for the plaintiffs’ lawyers.

Late last year the U.S. Court of Appeals for the Fifth Circuit held in Mississippi v. AU Optronics Corp. that a suit brought by Mississippi AG Jim Hood (with an assist from a Minnesota plaintiffs’ firm) against a manufacturer of liquid crystal display (LCD) screens on behalf of Mississippi citizens was removable to federal court under CAFA’s mass action provision. Citing binding authority from a previous Fifth Circuit case, Louisiana ex rel. Caldwell v. Allstate Insurance Company, the court reasoned that “[i]t is well-established that in determining whether there is jurisdiction, federal courts look to the substance of the action and not only at the labels that the parties may attach.” Citing CAFA, Judge Stewart lauded application of this rule in order “to prevent jurisdictional gamesmanship.” Continue reading

U.S. Supreme Court to Rule on Class Action Fairness Act’s “Mass Action” Provision

Cruz-Alvarez_FFeatured Regular Expert Column

Frank Cruz-Alvarez, Shook, Hardy & Bacon, L.L.P. (co-authored with Jared SherrShook, Hardy & Bacon, L.L.P.)

The Supreme Court granted certiorari on May 28 in Mississippi ex rel. Hood v. AU Optronics Corp., No.  12-1036, to determine whether the State of Mississippi’s parens patriae action against manufacturers, marketers, sellers, and distributors of LCD panels for an alleged price-fixing scheme is removable as a “mass action” under the Class Action Fairness Act (“CAFA”).  The U.S. Court of Appeals for the Fifth Circuit held that the district court erred in remanding the case to state court on the grounds that, while the suit was not a “class action” within CAFA, it satisfied CAFA’s “mass action” provision of § 1332(d)(11)(B).

The crux of the case turns on the question of whether the suit involves the claims of “100 or more persons” to satisfy CAFA’s “mass action” provision.  Id.  The Fifth Circuit reasoned, as it did in Louisiana ex rel. Caldwell v. Allstate Ins. Co., 536 F.3d 418, 424-25 (5th Cir. 2008), that “persons” in the “mass action” context are the “real parties in interest,” and not simply the named party in the pleadings.  Mississippi ex rel. Hood v. AU Optronics Corp., 701 F. 3d 796, 800 (5th Cir. 2012).  The court ruled that Mississippi’s complaint, the statutes under which Mississippi brought suit, and common law parens patriae authority led to the conclusion that the real parties in interest in the case far exceeded 100 people. Indeed, the Fifth Circuit found that, in actuality, Mississippi brought the case as a representative of its many citizen consumers who purchased the products at the center of the case.  Accordingly, it ruled that the suit was properly removed to federal court because it met the CAFA definition of a “mass action.”

The Supreme Court has never addressed federal “mass action” jurisdiction under CAFA and its ruling here is likely to have a significant impact.  In our opinion, the Court should affirm the Fifth Circuit’s interpretation of the “mass action” provision in CAFA because such an interpretation is consistent with Congress’s intent, which was to broaden federal court diversity jurisdiction to encompass “interstate cases of national importance,” as a means of protecting out-of-state defendants from potential state-court bias.  CAFA § 2(b)(2).  This lawsuit, brought by the Mississippi Attorney General for significant damages against leading domestic and foreign manufacturers of LCD panels, is precisely the type of case contemplated by CAFA.

Because the State of Mississippi is suing for significant damages in a representative capacity on behalf of numerous Mississippi citizens and consumers of LCD displays, CAFA’s “mass action” provision is satisfied. States like Mississippi should not be permitted to circumvent CAFA and evade removal jurisdiction simply by pleading a parens patriae action.  A different result would allow plaintiffs’ lawyers to game the system to avoid removal.

5th Circuit Splits with Other Federal Courts on CAFA and Attorney General Suits

5thCir

Directly conflicting with three other circuit courts, the U.S. Court of Appeals for the Fifth Circuit has ruled that the Mississippi Attorney General’s parens patriae antitrust suit against various LCD display makers qualifies as a “mass action” under the Class Action Fairness Act and must be litigated in federal court (Mississippi v. AU Optronics Corp.).

Under CAFA, an action may be removed to federal court if it involves claims of 100 or more persons, includes common questions of law or fact, and seeks at least $5 million in damages. In deciding jurisdiction for the Mississippi Attorney General’s suit, the Fifth Circuit stated that the “decisive question” was “whether the suit involves the claims of ‘100 or more persons.’ If so, the suit is a mass action and removal is proper.”

The three-judge Fifth Circuit panel said that it was guided by a precedential 2008 case, Louisiana v. Allstate. In that case, a panel adopted what is now known as the “Caldwell claim-by-claim approach” and ruled that the interested persons in the case against the insurance industry were the individual policy holders and not the Louisiana Attorney General. The Fifth Circuit explained that the Caldwell approach instructs the court to “pierce the pleadings and look at the real nature of the state’s claims” to determine if the state is the plaintiff or if the state is suing on behalf of individuals. Continue reading

Update: U.S DOJ & California Pursue Antitrust Claim vs. eBay on “Anti-Poaching” Agreement

In separate Legal Pulse posts last February and April, we noted developments in a private antitrust class action lawsuit, In re: High-Tech Employee Antitrust Suit. The suit piggybacked on a settlement the U.S. Department of Justice had reached with a number of companies who had entered into an agreement to avoid “poaching” each other’s engineering employees.

While that private suit advances towards trial, reports this past Friday indicated that DOJ and the California Attorney General have filed complaints against eBay for having an anti-poaching agreement with Intuit. Intuit was not named as a party to the complaints, according to DOJ, because it was one of the five companies to enter into the settlement in 2011. According to a Reuters story, the eBay complaint arose out of the earlier investigation which led to charges against Intuit.

One would expect a follow-on class action lawsuit against eBay (whose path to trial has been made easier by the April ruling in In re: High-Tech Employee) to be filed any day.

State Attorneys General Step to the Fore on Off-Label Drug “Promotion”

Cross-posted at WLF’s Forbes.com Contributor blog

With their law enforcement counterparts at the federal level raking in prodigious financial settlements, it’s no surprise that state attorneys general (“state AGs”) want a bigger piece of the action on off-label drug “promotion” regulation. The $181 million settlement reached August 29 between 36 attorneys general and a drug maker confirmed that state AGs must indeed be reckoned with on off-label issues. What will get medical product companies’ attention is not the financial settlement, though. The real eye-opener was the precision of the settlement’s conduct requirements, most notably one restraint on speech which goes beyond the dictates of federal law.

The settlement arose from “deceptive marketing” suits filed by state AGs throughout the country involving Ripersdal. Some of those suits resulted in verdicts imposing six- or seven-figure damages on the defendant, Janssen Pharmaceuticals. Janssen and its parent company, Johnson & Johnson (J&J), had appealed those verdicts, but the cost-benefit calculus of fighting vs. settling likely led the companies to resolve the claims on a global basis (much like the tobacco companies did with the state AGs).

In addition to the monetary settlement, Janssen and J&J agreed to conditions and limitations on how they share information about Ripersdal with medical professionals. As noted above and emphasized by former FDA associate chief counsel Arnie Fried in a Pharmalot interview, such behavior-changing dictates were what the AGs were really after here. Continue reading

Shoddy Drafting or Part of the Plan?: The “Natural” Problem in California’s Biotech Food Labeling Initiative

Natural

Cross-posted at Forbes.com’s Washington Legal Foundation contributor page

The “California Right to Know Genetically Engineered Food Act,” also known as Proposition 37 (“Prop 37″), advances the deeply misguided aspirations of several powerful special interests, including the plaintiffs’ bar, environmentalists, and public health activists. Part of this ballot initiative would require all raw and processed foods whose production was impacted in any way by biotechnology to be labeled as such. Prop 37 allows private citizens (i.e., lawyers) to sue farmers, distributors, grocers, and food companies for $1,000-a-day fines and punitive damages if a product is out of compliance.

The mandated labeling and the private enforcement provisions of the initiative have received an increasing amount of attention. There is, however, another part of Prop 37 which has been subjected to very little public scrutiny. That is about to change, however, because this section contains a possible poison pill that may sink the entire initiative. In addition to requiring “genetically engineered” labels, Prop 37 prohibits the use of terms such as “natural” and “all natural” in product packaging and any advertising and promotional materials.

Unnatural?

This prohibition of course applies to products impacted by biotechnology. But it also can apply to other foods regardless of whether or not they have been genetically engineered or include ingredients that have been. The California Attorney General’s title and summary of Prop 37 reflects this, as does the independent, non-partisan Legislative Analyst’s Office‘s summary. The “Yes on Prop 37″ crowd urged a state judge to clarify that the “natural” marketing ban only applies to genetically engineered processed foods. But on August 10, the judge denied their request, instead ordering a minor wording change to the Legislative Analyst’s Office’s summary. Continue reading

Courts Reject States’ Drug Pricing “Regulation Through Litigation”

Guest Commentary

by Frank Cruz-Alvarez and Jared Sherr, Shook, Hardy & Bacon, L.L.P.*

Over the past several years, states represented by contingency-fee attorneys have sued virtually the entire pharmaceutical industry alleging fraud in the reporting of prices and other information for drugs covered under Medicaid programs.  In recent weeks, two more courts have ruled against states pursuing these types of claims, and in the process have rejected the underlying “regulation through litigation” agenda presented by these types of lawsuits.

In the first case, Sandoz, Inc. v. State of Alabama, 2012 WL 1081402 (Ala. July 13, 2012), the Alabama Supreme Court ruled 7-1 to overturn a verdict against generic drug manufacturer Sandoz, Inc. totaling over $78 million in compensatory and punitive damages.  Sandoz involved almost identical claims as the 2009 Alabama Supreme Court case of AstraZeneca LP v. State of Alabama, 41 So. 3d 15 (Ala. 2009). Specifically, the State of Alabama alleged that it was unaware that Sandoz reported inflated “list prices” to an independent price reporting service that did not include discounts, rebates or other price concessions. The state alleged that it relied on these “list prices” in its Medicaid reimbursement formulas and, as a consequence, over-reimbursed providers and pharmacies.

After a review of the factual record, and an analysis of the 2009 ruling in AstraZeneca, the Alabama Supreme Court concluded that the state could not have reasonably relied on Sandoz’s published prices for two reasons.  First, the state had actual knowledge of the inflated prices reported by Sandoz, a conclusion the court supported by chronicling the history of the Alabama Medicaid Agency’s awareness of the reporting of inflated prices.  Second, the court, reaffirming its holding in AstraZeneca, concluded that the state did not rely on the reported prices because   the state’s reimbursement formulations were the result of independent “conscious and deliberate policy decisions.”  Continue reading

NY Attorney General Invokes Federal NEPA to Extinguish Natural Gas Boom

Guest Commentary

by Ry Ellison, a 2012 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

A hodgepodge of complex and confusing laws have left natural gas developers in “regulatory limbo”—stunting development of upstate New York’s massive Marcellus Shale formation and jeopardizing thousands of well-paying jobs for New Yorkers.   Further compounding the regulatory uncertainty—which was originally spawned by a patchwork of laws signed by Governor Andrew Cuomo—is a lawsuit filed by Attorney General Eric T. Schneiderman.  Ultimately, Schneiderman’s lawsuit represents a proxy battle in the larger “fracking war” between environmental activists and natural gas developers.   

The lawsuit, which pits the state of New York against the federal government, seeks to suspend the use of hydraulic fracturing pending yet another review of the natural gas-extraction technique’s impact on the state’s water supply.  Schneiderman claimed that the Environmental Protection Agency, the Army Corps of Engineers, and other federal defendants, along with the Delaware River Basin Commission (“DRBC”) violated the National Environmental Policy Act of 1969 (“NEPA”) by refusing to prepare an Environmental Impact Statement (“EIS”) analyzing the impact of hydraulic fracturing in the Delaware River Basin.  Specifically, Schneiderman alleged that the defendants’ failure to comply with NEPA by not performing an EIS “threatens significant harm to New York’s waters” and would result in “increased air pollution in New York, and adverse health impacts for New Yorkers.” Continue reading