Drug Companies' Rebellion Against "Abusive" Lawsuits Could Strip Investors of More Rights

Last Updated Apr 14, 2010 12:52 PM EDT

Three drug companies -- Amgen (AMGN), Allergan (AGN) and Abbott Labs (ABT) -- have recently complained about the high cost of fighting lawsuits and government subpoenas, but now someone is finally doing something about it: The Washington Legal Foundation -- a conservative legal think tank which has acted successfully as Big Pharma's stalking horse before -- is attempting to change the law to give drug companies a quicker way out of "abusive" shareholder class action cases.

The change WLF proposes, however, would essentially strip investors of their few remaining rights to hold drug companies accountable for hiding damaging information about their products.

Much of the cost of fending off legal claims comes in the "discovery" process, where companies are required to turn over truckloads of internal documents to plaintiffs' lawyers. Allergan, for instance, recently estimated that it could spend up to $100 million simply responding to subpoenas from the Department of Justice's inquiry into its marketing of Botox. The DOJ hasn't even filed a lawsuit in that case, but it doesn't issue such subpoenas unless it believes there might be a need for one. Allergan has filed a civil suit complaining that it has a right to say the things the DOJ is investigating.

Abbott lost a ruling in federal court in which it complained about the high cost of producing all the emails of CEO Miles White, svp/operations William Dempsey, and COO Jeffrey Leiden from 2002 through 2008. Abbott estimated the cost of retrieving the emails -- which refer to whether the company sold the bipolar disorder pill Depakote for unapproved uses -- at north of $10,000. Separately, Beth S. Rose, a lawyer at pharmaceuticals law firm Sills Cummis & Gross, told Metropolitan Corporate Counsel that discovery is so expensive defendants sometimes settle rather than fight, even if the suit is meritless:

Recently, the firm represented the plaintiff in a commercial case where approximately $1.5 million was in dispute. ... It soon became clear that the cost of preserving and collecting e-discovery from the client had the potential to cost as much as the value of our claim. ... When the client estimated what the final cost of the e-discovery was likely to be, a decision was made to settle the claim.
In drug cases, the sheer volume of documents required creates its own expense, Rose said:
... I was involved in a mass tort case in which there were hundreds of plaintiffs who claimed that their ingestion of a particular drug caused them injury. My client produced millions of pages of documents,which translated into approximately 600,000 documents. During the first trial, there were approximately 250 exhibits that were moved into evidence. A large portion of the documents were "learned treatises," which under rule 803(18) were not provided to the jury during their deliberations. Another large chunk of documents consisted of plaintiff's medical records. In other words, very little of the e-discovery was used at trial.
If the WLF gets its way, companies will get a new weapon to fend off suits and make them cheaper. The WLF has filed an amicus brief in a case involving shareholders who sued Amgen for allegedly failing to reveal damaging information about the safety of two of its anemia drugs, Epogen and Aranesp. They claim that the stock price was artificially inflated until 2007, when Amgen updated the warning label on its drugs with new information about kidney failure and cancer risks.

The WLF -- which says it is not linked to Amgen -- argues that because concerns about the safety of both drugs were widely aired in the marketplace before Amgen updated its warnings, investors cannot have relied solely on Amgen's disclosures, and therefore could not have been misled. (Download the WLF's brief here.) Amgen ought to be able to use this argument to win a summary judgment, which allows judges to kick frivolous cases out of court at an early stage before they become too expensive, the WLF says.

On its face it sounds like a good idea. If it's obviously the case that investors weren't misled, shouldn't a judge be able to consider that before a company spends $100 million to "prove" it? The problem with WLF's argument is that it fails to counter two crucial issues. First, in summary judgments judges are supposed to assume the plaintiffs' case is true and then decide whether those facts add up to a legal basis for a case. Almost no weight is given to the defense's facts (only its legal arguments).

If the WLF's argument is followed, it could radically alter the standard for summary judgment and force judges to make fact-finding decisions about both sides' cases absent actual proof. It would end the simple inquiry into whether the plaintiff has gotten the law right and start a complicated, open-ended, he said/she said inquiry into whose alleged facts, absent any evidence, are probably stronger.

Second, there's a big difference between "noise" in the marketplace caused by academic studies that show safety issues with drugs and the company itself actually admitting its products have a problem. WLF is basically saying that so long as someone, somewhere complained about a drug, it doesn't matter if the company itself failed to disclose known problems. That analysis would let companies of the hook in almost every situation where they knew of a danger but did nothing. It could even tempt drug companies to encourage critical safety studies in the knowledge that such reports would inoculate them from charges of failing to make the same disclosures.

The key issue in all these cases -- the issue that goes to the jury, basically -- is, What did the company know and when did it disclose it? If the disclosure was late, then investors may have been misled. So even if the court adopts the WLF's scheme, it may still be of no help to drug companies if they sat on crucial information for months or years while their stock flew high.

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Gavel image via Flickr user Thomas Roche, CC 2.0.