Recently, the United States Court of Appeals for the Third Circuit allowed a group of third party payors, including union health and welfare funds, to continue pursuing their racketeering class action suit against GlaxoSmithKline related to the diabetes drug Avandia. The Third Circuit found that allegations that the funds overpaid for Avandia were material enough to survive dismissal.
This case goes back several years to soon after the FDA approval of Avandia. The FDA had concerns about heart-related disease being linked to Avandia and asked GSK to stop minimizing the risk of heart attacks and heart-related chest diseases in its marketing and required GSK to update their warning on the drug to include new data about the potential increased occurrence of heart attack and heart-related chest pain in some Avandia patients. A study published in The New England Journal of Medicine concluded that, compared with the use of competing diabetes drugs, Avandia was associated with a significant increase in the risk of myocardial infarction and a borderline-significant increase in the risk of death from heart-related diseases. The third party payors in this case allege that GSK responded to that study with a marketing campaign designed to sway doctors and consumer confidence by challenging the study’s methodology and conclusions.
The third party payors who brought this suit assert that GSK’s failure to disclose Avandia’s significant heart-related risks violated RICO based on predicates of mail fraud, wire fraud, tampering with witnesses, and use of interstate facilities to conduct unlawful activity. They also assert claims for unjust enrichment and violations of the Pennsylvania Unfair Trade Practices and Consumer Protection law and other states’ consumer protection laws. Plaintiffs specifically allege that GSK selectively manipulated data and scientific literature, made false and misleading statements in its 2007 advertising campaign, and intimidated physicians to publish false and misleading articles to increase Avandia sales and that the third party payors included Avandia in their formularies in reliance on these misrepresentations by GSK.
GSK moved to dismiss this claim in November 2010 based in part on the fact that the plaintiffs failed to adequately allege standing under Section 1964(c) of RICO.
Under the Racketeer Influenced and Corrupt Organizations Act, a party must show that they have suffered an injury to business or property and that the plaintiff’s injury was caused by the defendant’s violation of 18 U.S.C. § 1962 to have standing to bring the suit. The court set a precedent in Maio v. Aetna, which established that Section 1964(c) of RICO’s “limitation of RICO standing to persons ‘injured in [their] business or property’ has a ‘restrictive significance, which helps to assure that RICO is not expanded to provide a federal cause of action and treble damages to every tort plaintiff.'”
In Maio, the Court considered whether health insurance beneficiaries could maintain a RICO claim for economic injury against their insurer based on alleged misrepresentations regarding the services included in their HMO plans. In that case, the Court rejected the plaintiff’s claims, setting a precedent upon which GSK heavily relied. The Court in that case construed the insured parties’ property interests as the intangible “contractual right to receive benefits in the form of covered medical services,” and found that the insured parties had suffered no injury absent allegations that they had received “inadequate, inferior delayed care, personal injuries resulting therefrom, or [the] denial of benefits due under the insurance arrangement.”
GSK argued that the third party payors were improperly relying on future events (that Avandia and related drugs would prove unsafe or ineffective) to show RICO standing. However, the Third Circuit deemed that the third party payor’s alleged damages “do not depend on the effectiveness of the Avandia that they purchased, but rather in the inflationary effect that GSK’s allegedly fraudulent behavior had on the price of Avandia. As such, the [third party payor’s] theory of economic loss does not require factual speculation. If we accept the plausible allegations in the complaint as true, the fraudulent behavior alleged in their complaint has already occurred, and its effect on the price of Avandia is not contingent on future events.”
The Court also found that the funds have already linked GSK’s alleged conduct to their injury, “The conduct that allegedly caused plaintiffs’ injuries is the same conduct forming the basis of the RICO scheme alleged in the complaint — the misrepresentation of the heart-related risks of taking Avandia that caused TPPs and [pharmacy benefit managers] to place Avandia in the formulary. The injury alleged by the TPPs is an economic injury independent of any physical injury suffered by Avandia users.”
The Court determined that GSK’s reliance on Maio is distinguishable from this case because the third party payor’s damages do not depend on the effectiveness of the Avandia that they purchased, but rather on the inflationary effect that GSK’s allegedly fraudulent behavior had on the price of Avandia.
This decision by the Third Circuit, while uncommon, is not the end of the case. This decision is simply one that will allow the third party payors to proceed in their case against GlaxoSmithKline. The case will continue on and will be judged on the merits. The Third Circuit made clear that many of the issues covered in this decision will resurface in the future, and that their decision that it “would be premature to dismiss plaintiffs’ well-pled RICO allegations at this juncture,” does not signal a case win for the third party payors down the road.