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From Products Liability Law Daily, November 10, 2016

GlaxoSmithKline might be liable under RICO for sale of adulterated drugs

By Mark Engstrom, J.D.

Blue Cross Blue Shield Association (BCBS) and 40 other private health insurers could proceed with federal RICO claims against GlaxoSmithKline (GSK) for injuries they allegedly sustained by spending billions of dollars on adulterated GSK drugs that were purchased in reliance on alleged misrepresentations that the drugs had been manufactured in accordance with federal safety and quality practices, the federal district court in Philadelphia has ruled. Because the insurers had adequately pleaded an injury to their business or property for the purpose of standing, and because the merits of GSK’s statute of limitations defense turned on factual issues that could not be resolved on the pleadings, dismissal of the insurers’ complaint was unwarranted (Blue Cross Blue Shield Association v. GlaxoSmithKline LLC, November 9, 2016, Sanchez, J.).

Federal law requires that pharmaceutical drugs be manufactured in accordance with "current Good Manufacturing Practices" (cGMPs)—standards codified in C.F.R. Parts 210 and 211 and enforced by the Food and Drug Administration (FDA)—to assure that those drugs met acceptable standards of safety, quality, purity, identity, and strength.

Between 1997 and 2006, GSK distributed and sold large quantities of adulterated drugs in the U.S. market. All of the drugs were manufactured in Cidra, Puerto Rico, in a plant that was owned and operated by a GSK subsidiary (SB Pharmco Puerto Rico). The Cidra plant was riddled with chronic and pervasive manufacturing and quality problems that violated numerous cGMPs and affected the integrity of every drug that was manufactured there, the court noted. Both GSK and SB Pharmco were aware of those problems and deliberately cut corners to maximize profits.

In 2013, the insurers sued GSK. Their complaint alleged that GSK had violated federal and state law by fraudulently inducing their payment of billions of dollars for adulterated drugs. The insurers asserted RICO claims under 18 U.S.C. §§1962(c) and 1962 (d), civil insurance fraud, and other causes of action.

Injury. The court noted that, under In re Avandia Marketing, Sales Practices & Products Liability Litigation, 804 F.3d 633 (3d Cir. 2015), an insurer’s overpayment for a pharmaceutical drug was a concrete economic injury when the overpayment was based on the manufacturer’s deceptive marketing practices. In this case, the insurers pleaded an analogous injury, according to the court.

Significantly, the insurers claimed that GSK’s omissions and misrepresentations had injured their business and property because the insurers had justifiably relied on GSK’s fraudulent actions by placing adulterated and effectively worthless drugs on their formularies and by subsequently paying for them. The insurers further alleged that, but for GSK’s fraudulent concealment of the ongoing regulatory violations at the Cidra plant and GSK’s omissions and misrepresentations regarding the safety, quality, purity, identity, and strength of the at-issue drugs, the insurers would not have paid for the drugs. As in In re Avandia, the plaintiffs’ injury did not depend on the drugs’ ineffectiveness, or on factual speculation concerning future events, but rather on GSK’s alleged misrepresentations about the production, quality, and safety of the drugs.

GSK argued that In re Avanadia was distinguishable because the plaintiffs in that case had alleged that the misrepresentations about the safety profile of a drug led to higher prices (the price effect) as well as an increase in the quantity of drugs that were prescribed by physicians (the quantity effect). In this case, however, the insurers had alleged that the at-issue drugs were adulterated and rendered worthless by the cGMP violations; they did not explain how a failure to disclose those violations had any bearing on the quality of the at-issue drugs.

According to the FDA, "adulterated" did not mean that the drugs were ineffective, unsafe, or otherwise caused harm, GSK observed; the term was merely a regulatory designation about the conditions of the plant where the drug was manufactured, and the drugs could still meet their labeled specifications. GSK thus argued that the insurers’ description of the at-issue drugs as "worthless" was unfounded, and consequently, that their allegations of economic harm were also unfounded.

The court noted that the law was unclear about the extent to which cGMP violations, by themselves, affected the worth of a drug. Nevertheless, the insurers were entitled to proceed with their argument that the nature of GSK’s violations had a material effect on the at-issue drugs. Even if the word "adulterated" was not interchangeable with "unsafe" or "ineffective," the In re Avandia court had decided that an at-issue drug did not have to be defective to maintain a RICO action; instead, the plaintiffs had to show that the masking of safety risks affected the drug’s value.

Although the insurers in this case did not allege the same "excess price" and "quantity effect" theories that the plaintiffs in In re Avandia had asserted, they did assert a theory—with supporting facts—that included elements of both theories. More specifically, the insurers asserted that GSK’s non-disclosure of cGMP violations rendered the at-issue drugs worthless, and further asserted that physicians would have not prescribed the at-issue drugs at all—had GSK not concealed those violations—because the insurers would not have placed the at-issue drugs on the their formularies.

Notwithstanding GSK’s contrary allegations, the insurers had adequately connected GSK’s non-disclosure of cGMP violations—and the effect of those violations on the quality and packaging of GSK drugs—to the insurers’ payments for drugs that allegedly had no value, the court concluded. Moreover, the insurers had alleged throughout their complaint that they had paid for the "adulterated" at-issue drugs. In addition, they characterized themselves as the "principal payers" for the at-issue drugs, and they alleged that they had paid billions of dollars for the adulterated drugs that were manufactured at the Cidra plant, that they were the biggest single source of GSK revenues in the U.S. market for the drugs at issue, and that they collectively represented about 70 percent of the U.S. market for non-governmental health insurance. In the court’s view, the insurers had plausibly alleged that they had paid for drugs from the affected lots, which caused an economic injury.

In light of the factual allegations that were asserted in conjunction with the allegations of an economic injury—i.e., GSK’s cGMP violations, the quality of drug issues, the FDA’s seizure of adulterated drugs, and the existence of a permanent injunction that prevented GSK from directly or indirectly introducing or delivering into interstate commerce any adulterated products from the Cidra plant—the insurers had sufficiently pleaded an injury to their businesses as a result of paying for the adulterated at-issue drugs, the court concluded.

Statute of limitations. Factual issues were present regarding inquiry notice and the insurers’ due diligence, the court decided, and for that reason, GSK’s motion to dismiss the RICO claims as time-barred was denied.

The insurers’ injuries allegedly arose between 1997 and 2006. Because the lawsuit was filed on July 15, 2011, the RICO claims would be timely only if they accrued on or after July 15, 2007. However, the injury discovery rule governed RICO claims, and the court could not conclude that the insurers knew or should have known about the extent of GSK’s misrepresentations regarding the cGMP violations at Cidra—or the resulting issues regarding the quality and safety of the at-issue drugs—at any time before July 11, 2007.

According to the court, factual issues remained as to whether public disclosures of the cGMP issues between 2002 and 2005 constituted "storm warnings" that established inquiry notice, especially in light of GSK’s attempts to minimize the extent of its cGMP violations, the violations’ effect on the quality and safety of the drugs that were produced at Cidra, and the FDA’s involvement in the investigation of the Cidra plant. Although the FDA’s March 2005 seizure of the plant’s drugs and a subsequent Consent Decree were widely covered in the news media, GSK downplayed the extent of those issues and assured the public of its compliance with the FDA’s demands. Ultimately, further discovery was necessary to determine whether: (1) GSK had affirmatively concealed information that misled the insurers and (2) the insurers had exercised reasonable due diligence to stay apprised of GSK’s potential wrongdoing before 2007.

The case is No. 13-4663.

Attorneys: G. Robert Blakey [University of Notre Dame], Geoffrey M. Horn (Lowey, Dannenberg, Cohen & Hart, PC), and Lesley Ann Skillen (Getnick & Getnick LLP) for Blue Cross Blue Shield Association, Aetna Inc., and Amerigroup/HMS. Joseph E. O’Neil (Lavin, O'Neil, Cedrone & Disipio) and Mark H. Lynch (Covington & Burling) for GlaxoSmithKline LLC.

Companies: Blue Cross Blue Shield Association; Aetna, Inc.; Amerigroup/HMS; GlaxoSmithKline LLC

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