imageThe Third Circuit’s decision in In re Avandia Marketing, Sales Practices & Product Liability Litigation, No. 14-1948 (3d Cir. Oct. 26, 2015), accepts a path-breaking fraud-on-the-intermediary theory under the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO), which allows you to recover three times your actual damages plus reasonable attorneys’ fees. Expect more cases like this.

Diabetes drug

GlaxoSmithKline LLC (GSK) started selling Avandia, a treatment for Type II diabetes, the most common type, in 1999. GSK touted the drug as better and safer than the options then on the market. But buyers of Avandia paid at least twice what the alternatives cost.

The seeming merits of GSK’s new offering prompted third-party payors (TPPs) to add Avandia to their “formularies”. As the Third Circuit explained:

The formularies are prepared by analyzing research regarding a drug’s cost and effectiveness, safety and efficacy. When a [pharmacy benefit manager] determines that a drug offers advantages over a competing drug, it will give that drug preferred status on the formulary. A TPP will typically cover more of the cost of a particular drug when that drug has a higher preference status on the formulary. The greater coverage of cost by the TPP allows the member to pay a lower co-payment when prescribed the drug.

In re Avandia, slip op. at 6.

Over the years, Avandia produced billions of dollars in sales for GSK.

Trouble in drugland

In 2007, The New England Journal of Medicine published a study that found Avandia raised the risk of  heart attack by 43 percent. (More than two-thirds of diabetics die of heart attack or stroke.) GSK responded with a marketing campaign to discredit and drown out the study. The Food and Drug Administration (FDA) allowed GSK to keep selling Avandia but mandated more warnings on packaging.

On February 20, 2009, Allied Services Division Welfare Fund, a TPP in Illinois, filed a class action case alleging that GSK violated Pennsylvania’s and other states’ consumer protection laws. Another followed in May 2010.

On September 23, 2010, after the U.S. Senate issued a damning report, the FDA sharply limited the patients doctors could prescribe Avandia to.

On October 13, 2010, a third TPP, United Benefit Fund, brought a RICO action. It alleged that a RICO “enterprise” included “co-promoter” Bristol-Myers Squibb and fraudulently promoted use of Avandia through a pattern of racketeering activity consisting of wire and mail fraud and other crimes.

Ruling for plaintiffs

The district court denied GSK’s motion to dismiss on standing grounds. It ruled that the plaintiffs had alleged enough of a “concrete injury” from GSK’s conduct. But the court also certified its decision for appeal.

The Third Circuit affirmed. It contrasted a case in which the plaintiffs alleged that a health maintenance organization made untrue promises about the quality of the healthcare services it would provide its members in the future. The case before the court differed because:

[T]he injury suffered by the TPPs here is not contingent on future events. The TPPs’ 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.”

Id. at 17 (emphasis in original).

The panel also rejected GSK’s point that doctors and patients made the causal link between GSK’s conduct and the TPPs’ injury too remote. It said:

GSK does not argue that a doctor’s decision to prescribe Avandia or a patient’s decision to take Avandia caused plaintiffs’ injuries. 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 PBMs to place Avandia in the formulary.

*  *  *  *

The amount of damages is either the difference between what Avandia coverage cost and the cost of coverage of cheaper, safer drugs and/or the overvaluation of Avandia caused by GSK’s misrepresentations. This issue of damages, rather than demonstrating a lack of proximate causation, raises an issue of proof regarding the overall number of prescriptions (under the “quantity effect” theory) or amount of price inflation (under the “excess price” theory) attributable to GSK’s actions.

Id. at 26-27.

Fraud-on-the-intermediary theory

The outcome in Avandia validates a damages approach that could prove potent. The methodology posits that a defendant’s fraudulent promotion of goods or services causes harm by inflating both (1) the cost of each resulting purchase transaction and (2) the number of transactions. The fact that the fraud works against intermediaries (the TPPs) makes the theory more plausible, not less. The TPPs’ main job consists of getting prices that reflect value and avoiding purchases that do no good.

It looks like a variation on the fraud-on-the-market theme to me. As in securities cases, the scheme pumps up the price the drug maker can charge all buyers. It also tricks TPPs into vouching for the drug, prompting more prescriptions, higher usage, and greater sales.

The Avandia plaintiffs still have a way to go. They must fend off multiple attacks, including the claim that the TPPs would not have acted differently if they had known the whole truth about Avandia’s risks. But I admire their ability to persuade the court of appeals to credit the link between an effort to inflate price and sales and a damages methodology that focuses on the improper degree of inflation — a fraud-on-the-intermediary approach.

Print:
Email this postShare this post on LinkedIn
Photo of Barry Barnett Barry Barnett

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

Barnett is a Fellow in the American College of Trial Lawyers, and Lawdragon has named him one of the top 500 lawyers in the United States three years in a row. Best Lawyers in America has honored him as “Lawyer of the Year” for Bet-the-Company Litigation (2019 and 2017) and Patent Litigation (2020) in Houston. Based in Texas and New York, Barnett has tried complex business disputes across the United States.

TRIAL COUNSEL
Barnett’s background, training, and experience make him indispensable to his clients. The small-town son of a Texas roughneck and grandson of a Texas sharecropper, Barnett “developed an unusual common sense about people, their motivations, and their dilemmas,” according to former client Michael Lewis.

Barnett has been historically recognized for his effectiveness and judgment. His peers chose him, for example, to the American College of Trial Lawyers and American Law Institute. His decades of trial and appellate work representing both plaintiffs and defendants have made him a master strategist and nimble tactician in complex disputes.

Barnett focuses on enforcement of antitrust laws, the “Magna Carta of free enterprise,” in Supreme Court Justice Thurgood Marshall’s memorable phrase. “Barry is one of the nation’s outstanding antitrust lawyers,” according to Joseph Goldberg, a member of the Private Antitrust Enforcement Hall of Fame. Named among Texas’s top ten antitrust lawyers of 2023, Business Today calls Barnett a “trailblazer” among the “distinguished legal minds” who “dedicate their skill and expertise to the maintenance of healthy competition in various sectors” of the Lone Star State’s booming economy. Barnett is also adept in energy and intellectual property matters and has battled for clients against a Who’s Who list of corporate behemoths, including Abbott Labs, Alcoa, Apple, AT&T, BlackBerry, Broadcom, Comcast, Dow, JPMorgan Chase, Samsung, and Visa.

Barnett commands a courtroom with calm and credibility and “is the perfect lawyer for bet the company litigation,” said Scott Regan, General Counsel of former client Whiting Petroleum. His performance before the Supreme Court in Comcast Corp. v. Behrend prompted the Court to withdraw the question on which it had granted review. The judge in a trial involving mobile phone technology called Barnett “one of the best” and that his opening statement the finest he had ever seen. Another trial judge told Barnett minutes after a jury returned a favorable verdict against the county’s biggest employer that he was one of the two best trial lawyers he’d ever come across—adding that the other one was dead.

COMPLETE PACKAGE
A versatile trial lawyer, Barnett knows how to handle a case all the way from strategic pre-suit planning to affirmance on appeal. He’s tried cases to verdict and then briefed and argued them when they went before appellate courts, including the Second, Third, Fifth, and Tenth Circuits, the Supreme Court of Louisiana, and (in the case of Comcast Corp. v. Behrend) the Supreme Court of the United States.

Barnett is a sought-after public speaker, often serving on panels and talking about topics like the trials of antitrust class actions and techniques for streamlining complex litigation. He also comments on trends in commercial litigation and the implications of major rulings for outlets such as NPR, Reuters, Law360, Corporate Counsel, and The Dallas Morning News. He’s even appeared in a Frontline program about underfunding of state pensions, authored chapters on “Fee Arrangements” and “Techniques for Expediting and Streamlining Litigation” (the latter with Steve Susman) in the ABA’s definitive treatise on Business and Commercial Litigation in Federal Courts, 5th, and commented on How Antitrust Enforcers Might Think Like Plaintiffs’ Lawyers.

HARD GRADERS
Clients and other hard graders have praised Barnett for his courtroom skills and legal acumen.

A client in a $100 million oil and gas case, which Barnett’s team won at trial and held on appeal, said Barnett and his team “presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom.” David McCombs at Haynes and Boone said Barnett “has a natural presence that goes over well with juries and judges.”

Even former adversaries give Barnett high marks. Lead opposing counsel in a decade-long antitrust slugfest said “Barry is a highly skilled advocate. He understands what really matters in telling a narrative and does so in a very compelling manner.”

CIVIC ENGAGEMENT
Barnett relishes opportunities to collaborate with all kinds of people. At the Center for American and International Law (CAIL), founded by a former prosecutor at Nuremberg in 1947 and headquartered in the Dallas area, he has served on the Executive Committee, co-chaired the committee that produced CAIL’s first-ever strategic plan, supported CAIL’s Institute for Law Enforcement Administration and other development efforts, and proposed formation of a new Institute for Social Justice Law. CAIL’s former President David Beck said “Barry is extremely bright” and is “very well prepared in every lawsuit or professional task he undertakes.”

Barnett is also a Trustee of the New-York Historical Society, a Sterling Fellow at Yale, a member of the Yale University Art Gallery’s Governing Board, a winner of the Class Award for his work on behalf of his college class, and a proud contributor to the Yellow Ribbon Program at Harvard Law. Barnett’s pro bono work includes leading the trial team representing people who are at greatest risk of severe illness and death as a result of being exposed to the novel coronavirus SARS-CoV-2 while being detained in the Dallas County jail—work for which he received the NGAN Legal Advocacy Fund RBG Award.

At Susman Godfrey, Barnett has served on the firm’s Executive Committee, Employment Committee, and ad hoc committees on partner compensation, succession of leadership, and revision of the firm’s partnership agreement. He also twice chaired the Practice Development Committee.

KEEPING PERSPECTIVE
Barnett understands that clients face many pressures. Managing the stress is important, especially in matters that take years to resolve. He encourages clients to call him whenever they have a question or concern and to keep the inevitable ups and downs in perspective. He wants them to know that he will do his level best to help them achieve their goals. He also strives to foster trust and to make working with him a pleasure.

Cyrus “Skip” Marter, the General Counsel of Bonanza Creek in Denver and a former Susman Godfrey partner and client, said Barnett is “excellent about communicating with clients in a full and honest manner” and can “negotiate for his clients from a position of strength, because he is not afraid to take a case through a full trial on the merits.” Stacey Doré, the President of Hunt Utility Services and a former client, said that Barnett is “an excellent trial lawyer and the person you want to hire for your bet-the-company cases. He is client focused, responsive, and uniquely savvy about trial and settlement strategy.” A New York colleague said, “Barry is a joy to work with as co-counsel. He tackles complex procedural and factual hurdles capably, efficiently, and without drama.”

PERSONAL
Barnett’s wide-ranging experience and calm, down-to-earth approach enable him to connect with clients, judges, jurors, witnesses, and even opposing counsel. He grew up in Nacogdoches, Texas. He co-captained his high school varsity football team as an All-East Texas middle linebacker while also serving as the Editor of Key Club’s Texas-Oklahoma District, won the Best Typist award, took the History Team to glory, and sang in the East Texas All Region Choir. As Dan Kelly of client Vistra Corp. put it, Barnett is “a great person to be around.”

Barnett is steady and loyal. He has practiced at Susman Godfrey his entire career. He and his wife Nancy live in Dallas and enjoy spending time in Houston and New York. Their daughter works for H-E-B in Houston, and their son is a Haynes and Boone transactions lawyer in Dallas.

As a member of Ivy League championship football teams in his junior and senior years at Yale and a parent of two Yalies, Barnett has no trouble choosing sides for “The Game” in November. And he knows how important fighting all the way to the end is. On his last play from scrimmage, in the waning minutes of The Game on Nov. 22, 1980, he recovered a Crimson fumble.

Yale won, 14-0.