On June 16, the Pennsylvania Supreme Court rejected the Commonwealth’s arguments that Bristol Myers Squibb (BMS) was liable for fraudulently overcharging state health agencies. The state had sued BMS and 13 other pharmaceutical companies and won a $27 million damage award. In the unanimous ruling, the Court dropped a noteworthy footnote in which it questioned Pennsylvania’s reliance on private contingent-fee lawyers to prosecute the case. The decision is just the latest in a string of costly failures by deputized plaintiffs’ lawyers in state actions against drug companies.
The Court’s unanimous Commonwealth v. TAP Pharmaceutical Products decision turned on whether the Pennsylvania agencies suffered any financial loss when taking into account the value of rebates that BMS provided the state for drug purchases. The state claimed that BMS took advantage of the complex “average wholesale price” (AWP) formula to artificially increase its profits from sales to health agencies. BMS denied those charges, and argued that even if the agencies were overcharged, the rebates offset the alleged financial harm. Despite testimony from state officials that they did take rebates into consideration when assessing drug payments, Pennsylvania excluded rebates when formulating its damages claim. The trial court bought the state’s justification for this contradictory stance, as did the Commonwealth Court on appeal.
The justices seemed shocked by the lower courts’ unquestioned acceptance of Pennsylvania’s stance on rebates. Justice Saylor wrote, “[T]his Court is not in need of a body of evidence to apprehend that a rebate operates to reduce the net price of a commodity.” The Supreme Court found it “astonishing” that the Commonwealth Court would allow the state to collect “a billion dollars in rebates relative to social welfare reimbursements while giving no credit to the payers.”
The Court concluded that Pennsylvania did not prove financial harm, and also bemoaned the state’s “abject failure” to cabin the “ten-year course of this litigation.” Justice Saylor then dropped a footnote which not-so-subtly tied the state’s wayward crusade to its choice of representation:
Parenthetically, we note that substantial concern has been expressed about the use by public agencies of outside counsel, with personal financial incentives, to spearhead litigation pursued in the public interest, including AWP litigation. See, e.g., Dayna Bowen Matthew, The Moral Hazard Problem with Privatization of Public Enforcement: The Case of Pharmaceutical Fraud, 40 U. Mich. J.L. Reform 281 (2007). At the very least, close supervision is required in such relationships, and, of course, the state agencies in whose name the cause is pursued bear the ultimate responsibility for the sort of overreaching which we find to have occurred here.
TAP Pharmaceutical Products is just the latest in a string of high-profile losses suffered by states (and their contingent-fee counsel) in pharmaceutical litigation. On March 20, the Arkansas Supreme Court rejected a $1.2 billion off-label marketing verdict won for the state at trial by its Texas-based plaintiffs’ attorneys against Janssen Pharmaceutica. On January 28, the Louisiana Supreme Court threw out a $331 million award in a similar case against Jannsen brought by deputized private attorneys.
Alabama and Pennsylvania have also recently had other pricing fraud lawsuits thrown out by state appellate courts. In both instances, contingent-fee counsel had driven the litigation on behalf of the attorneys-general. Pennsylvania came under considerable fire for the state AG-trial lawyer alliance in its case, in part because the Texas-based law firm (the same one representing Arkansas in the case mentioned above) had made over $90,000 in campaign contributions to then-Governor Ed Rendell’s reelection bid prior to being chosen.
After that experience, one would think that the Commonwealth of Pennsylvania would have learned not to hand off litigation responsibilities to self-interested tort lawyers. Maybe after the state Supreme Court’s footnote smack down, Pennsylvania will finally take the hint, and represent itself henceforth.
Count us skeptical, though.
Also published at WLF’s Forbes.com contributor page