Update 2006, Issue 2
With permission from FDLI, www.fdli.org
Multistate Investigations
of the Pharmaceutical Industry
by John J. Farmer, Michael D. Ricciuti, and Elizabeth M. Harris
Introduction
Amidst allegations of unlawful monopoly, patent abuse,
and price-fixing, pharmaceutical companies have become
particularly vulnerable to multistate investigations. With the
increased costs of healthcare, state attorneys general (AGs)
have focused their attention increasingly on “Big Pharma.”1
As with similar investigations in related industries, this has
proven to be a fruitful endeavor for state law enforcement.
In 2003, U.S. pharmaceutical companies alone sold more
than $230 billion in prescription drugs and related products.2
That same year, in three separate agreements, the National
Association of Attorneys General (NAAG) reached a $235
million settlement with two pharmaceutical companies—
Bristol Myers Squibb (BMS) and Aventis. As is the case with
most AG investigations that result in multi-million dollar
settlements, neither company admitted any wrongdoing.
This article discusses multistate investigations in the
pharmaceutical industry and suggests that these cases need
not always result in settlement. Rather, pharmaceutical
companies must weigh various considerations when faced
with a multistate investigation, because litigation sometimes
is an appropriate course of action.
Background
It is a fact of life that most multistate investigations,
whether they involve “Big Tobacco,” “Big Pharma,” or “Ma
Bell,” have not resulted in the litigation of the substantive
legal issues. Practical considerations relating to the sheer
cost of discovery, motion practice, and trial, balanced against
the risks attendant upon litigation, have caused most industries facing multistate investigations to opt for settlement.
These considerations are compounded in the pharmaceutical
industry by the complexity of the business, which necessarily
involves diverse areas of law, including consumer protection,
intellectual property, and antitrust law. Not surprisingly,
then, pharmaceutical companies have followed the lead of
other industries in defending multistate investigations and
litigation on a piecemeal basis, resulting in huge settleFDLI
ments that benefit state
treasuries. Adding to the
unique vulnerability of the
pharmaceutical industry is the
fact that compliance with state
regulations has become increasingly difficult because regulations vary
from state to state.3 Although state AGs
have been cracking down on the prescription drug
industry over the last five years, multistate investigations are
not new territory for state enforcement agents—they are only
new territory for pharmaceutical companies.
In 1907, the NAAG was founded to “facilitate interaction
among Attorneys General as peers.”4 Every state, Puerto
Rico, and the District of Columbia, is a member of NAAG,
which is governed entirely by AGs who serve as its officers
and committee members. NAAG’s President is responsible
for deciding what the “presidential initiative,” or area of
concern, will be. Over the last 10 years, presidential initiatives have focused on areas such as cybercrime, telecom-
Mr. Farmer is a Partner in
the law firm of Kirkpatrick &
Lockhart Nicholson Graham, LLP,
Newark, NJ.
Mr. Ricciuti is a Partner in
the law firm of Kirkpatrick &
Lockhart Nicholson Graham, LLP,
Boston, MA.
Ms. Harris is an Associate in
the law firm of Kirkpatrick &
Lockhart Nicholson Graham, LLP,
Newark, NJ.
March/April 2006
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29
munications, and, most recently, prescription drugs. Once
the presidential area of concern is defined, a “project” may
be established to study regulatory issues within that industry.
Although there is no formalized NAAG project committee
for prescription drugs, regulation of the pharmaceutical
industry occurs primarily through three major NAAG projects: the Antitrust Project, the Consumer Protection Project,
and the Medicaid Fraud Project.
Also serving as a watchdog of the pharmaceutical
industry is the Multistate Antitrust Task Force (Task Force),
a subcommittee of the Antitrust Project. NAAG formed the
Task Force in 1983 to assist in the investigation and litigation
of antitrust violations and to recommend legislation in that
area.5 This effort was backed by a $30 million grant given to
state AGs by Congress in the mid-1970s as part of the Crime
Control and Safe Streets Act.6 Multistate investigations also
are financed by funds received through other settlements
agreements, such as the Milk Fund, established from settlement monies in New York v. Dairylea Cooperative, Inc.7
In 1998, the states claimed a huge victory. The Tobacco
Master Settlement Agreement (MSA) was entered into
among 46 states and the four largest tobacco manufacturers
for costs incurred while treating residents with tobaccorelated illnesses.8 Under the MSA, manufacturers continue to
pay the states approximately $200 billion, with no restriction
on how those funds are appropriated. Given this trend toward
more aggressive enforcement by the states, the prominence
of the pharmaceutical industry nationally, and the skyrocketing costs of healthcare, in retrospect it would be only a
matter of time before Big Pharma felt the weight of state
enforcement.
A highly lucrative industry, the onslaught of multistate
investigations has cost pharmaceutical companies billions
in settlement and related litigation expenses. In 2003 alone,
state AGs settled with some of the largest pharmaceuticals
companies over allegations of consumer fraud, antitrust
behavior, and patent violations. Beginning in January 2003,
50 states settled with Aventis for $80 million in a suit alleging it unlawfully extended its patent for the heart medication
Cardizem® CD, by agreeing to pay a generic company to
delay entry of its generic equivalent.9 Had the generic drug
entered the market, Aventis would not have been the sole
distributor and Cardizem® CD would have been priced more
competitively.
In a similar case one month later, the states settled with
BMS for a total of $155 million in two separate patent
violations. In the first alleged violation, BMS delayed the
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generic equivalent of its medication, BuSpar®, from reaching the stream of commerce, resulting in a monopoly over
anti-anxiety medication.10 The states alleged secondly that
BMS fraudulently prevented the patent for Taxol®, a breast
cancer drug, from expiring, also resulting in a monopoly of
that market.11
Aside from litigating, state AGs also educate consumers
about the prescription drug market. Several states, including
New York,12 Florida,13 and Ohio,14 have created pharmaceutical price websites. Based on information from pharmacies
around the country, these interactive websites provide consumers with comparison information on the most frequently
prescribed drugs. More important, the websites reveal retail
price disparities for popular drugs like Flonase® nasal spray,
which one New York pharmacy sold for $19.35, while others
sold it for as much as $93.59.
The Investigation
Multistate investigations may be led by AGs alone, or
may be conducted in parallel with private plaintiffs who
have joined to create a class action lawsuit. These efforts are
likely to diminish with the passage of the Class Action Fairness Act,15 which severely limits the ability of consumers to
bring a class action suit. Under this law, frustrated consumers
defrauded by the marketplace will have a hard time seeking
relief without turning to state enforcement. The law undoubtedly will result in increased investigation of pharmaceutical
corporations and their pricing of prescription drugs.
Adding to the incentive to investigate corporate conduct
is the fact that AGs are popularly elected in 46 states. As a
result, they not only litigate, but also advocate for policies
that benefit consumers, an important constituency. In April
of 2003, for example, 46 AGs signed a letter addressed to the
Secretary of Health and Human Services and the Administrator of the Centers for Medicare & Medicaid Services,
asking both agencies to withdraw a rule that would have
allowed pharmaceutical companies to destroy drug-pricing
information.16 The letter proved successful, as the measure
was never enacted, thus making access to corporate records
by state investigators easier.
In a multistate case, the primary goal of AGs is to
recover damages on behalf of consumers and local entities.
Consumer cooperation is essential, therefore, to initiate an
investigation. The process is set up so that any person may
bring an antitrust or consumer protection violation to the
attention of their state AG. Although it is not an anonymous
process, when asked to do so, AGs try to maintain confiwww.fdli.org
dentiality. As a result, a single individual in one state may
trigger a full-scale, multistate investigation.
Because resources are scarce, states quickly will
determine if the case appears to have implications on a
multistate level. If so, states will begin by assembling a
“working group” of individuals from various states. The
responsibility of the working group is to formulate a civil
investigation demand (CID), which notifies the corporation
that it currently is under investigation by the state. Because,
historically, many of the early multistate investigations were
antitrust in nature, there currently is an active working group
focused on the industry. This means that there literally is a
full-time staff charged with the responsibility of investigating the various complaints brought against, among others,
pharmaceutical companies.
Upon receiving a CID, the corporation must decide
whether it will cooperate with the investigation demand or
assume an adversarial position. The benefit of assuming an
adversarial position is that the longer the case takes to investigate, the more expensive it may become for the states. In
addition, refusal to cooperate with state enforcement officials
makes the government’s job more difficult, as each state
must issue a subpoena for documents that otherwise could be
handed over. As a result, a determination could be made that
the issue is not worth pursuing. Keep in mind, however, that
a refusal to cooperate could increase hostility between the
states and the company.
The first thing an organization must do when faced with
a CID is contact that state’s AG. Unless corporate counsel
is familiar with the state investigative process, this is best
left to outside counsel. An attorney unfamiliar with these
types of cases, when acting alone, may harm the interest
of the organization. Attorneys experienced in complex
multistate litigation, on the other hand, often have on-going
relationships with state AG offices that allow them to
obtain information more easily. Also, these attorneys have
an understanding of the criteria state AGs consider when
determining whether to pursue a matter. More important,
they may dissuade state AGs from moving forward with
the case altogether. During this phase, continuous contact
with the lead states can help the organization understand the
shape the investigation is taking, which, in turn, assists in the
development of a tactical response.
During the course of the investigation, state AGs will
interview witnesses and subpoena documents from the
corporation. Legal counsel for the corporation should
contact the office of the lead AG to understand the scope of
FDLI
the demand. Once again, a decision must be made whether
to comply with or challenge the subpoena. In a large-scale
investigation, challenging multiple subpoenas could become
costly and chaotic. Nonetheless, challenging a subpoena
could prove advantageous in the long term, as it may expose
weaknesses in the states’ case, thereby avoiding a more
costly settlement.
There is the additional concern of protecting highly
confidential information. During an investigation, AGs have
broad subpoena power to access all sorts of documents, even
those that typically are not discoverable during the course
of litigation. Although most CIDs state that any information
obtained is confidential, there is an opportunity for this
information to leak out to the public. Some states have penalties for any disclosure, in many others, however, information obtained from a CID is not automatically treated as
confidential. Rather, it is the responsibility of the investigated
organization to label information confidential, or to seek a
protective order that does so. Some materials automatically
receive heightened confidentiality status (e.g., merger documents and trade secrets). Also, because the mere rumor of an
investigation is enough to trigger a decline in stock prices,
most AGs adopt a policy where they neither confirm nor
deny the existence of an on-going investigation. Nonetheless,
this information still is accessible by numerous individuals,
including paralegals, secretaries, and other attorneys at state
offices that have access to sensitive information.
Litigation
Once the lead state has decided to move forward with a
lawsuit, it will form a working group of state AGs to handle
the case, and soon thereafter, will file a complaint in federal
court or in multiple state courts. Accordingly, a corporation’s
decision whether to litigate or settle must be made quickly.
At this point, the company’s attorney should have an understanding of the evidence against the business. While the
company is deciding how to move forward, the investigating
committee is inviting other states to enter into the suit. In
deciding whether to join in the case, states will consider factors such as the nature of the corporate conduct and whether
its effect is widespread. Depending on the level of state interest, a company easily may end up defending a lawsuit against
every state in the Union. This is particularly advantageous
for AGs because the more states that are involved, the greater
the amount of human and financial resources that can be
devoted to prosecuting the matter. As discussed previously,
an experienced attorney who has established relationships
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with AGs in other states may be effective in convincing those
states not to join the investigation.
In carving out its strategy, the corporation necessarily
must consider other named defendants. Multistate cases in
particular tend to have numerous defendants, as in a 2003
settlement by BMS, Watson Pharma, Inc., and Danbury
Pharmacal, Inc. over allegations of unfair competition.17
A company may join with other co-defendants in deciding
whether to litigate or to settle. Ultimately, however, the
corporation must pursue a course of action that makes smart
business sense, even if it means deviating from the strategy
the co-defendants have chosen.
A second consideration is whether the suit is a combined
effort between state and federal enforcement. Because most
claims against pharmaceutical companies involve intellectual
property and unlawful competition, federal laws often are
implicated. Although state AGs have the authority to enforce
both state and some federal laws, federal agencies (e.g., the
Federal Trade Commission (FTC) and the Department of
Justice) may join forces with the state AGs to prosecute these
cases. A joint prosecution between state and federal government means that twice the amount of human and financial
resources are being allocated towards that case.
The corporation also must decide whether it will retain
separate legal representation for its employees. This decision
often depends on the laws of the state of incorporation. Some
states require indemnification for employees, and even allow
for the payment of legal fees. Both the corporation and the
government benefit from representation by a single firm.
First, the government need only turn to one source to obtain
discovery materials and to schedule interviews. Representation by a single firm also facilitates cohesiveness and
cooperation by employees in carrying out the corporation’s
goals during the investigation. There are risks associated
with representation by a single firm, however, such as
potential conflicts of interest. Attorneys must represent their
clients with zealousness, but in some cases it may not be
possible to fulfill this obligation to both the corporate entity
and individual employees.
In some cases, settlement is reached before a complaint is
even filed, as in a 2004 consent decree with Warner-Lambert
over its promotion of Neurontin®, where the states expressed
“concern” about the company’s marketing practices.18
Nonetheless, a considerable number of settlements are reached
after a complaint has been filed. For instance, after conducting
an investigation of Mylan Labs, Gym Labs, Profarmaco, and
Cambrex, 33 states, in conjunction with the FTC, brought
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suit against these companies on May 13, 1999 for antitrust
violations and unfair competition.19 Less than two years later,
in February 2001, the parties settled.20 The agreement likely
occurred during the discovery phase of litigation, when a
corporation is most vulnerable to being exposed, and more
likely to settle. Similarly, in In re Disposable Contact Lens
Antitrust Litigation, 32 states and a certified class of plaintiffs
litigated through a jury trial for five weeks before settling with
defendants.21 It is likely that some companies try to “hold out”
as long as possible before agreeing to a settlement, indicating
some strength in their case.
Settlement
Both sides have an incentive to settle—it saves both time
and a considerable amount of money. The typical multistate
litigation lasts about six years and results in almost 700
docket entries.22 Depending on the nature of the action, court
approval may be necessary before a settlement agreement
can be entered. This is true especially for class action suits,
where the court will consider whether the agreement is fair
and reasonable for all class members. Also, settlements by
pharmaceutical companies are not purely monetary—they
are complex documents that detail the settlement amount and
the various forms of injunctive relief.
Settlement funds can be dispersed in a variety of ways.
Usually, the settlement agreement will call for the funds to be
deposited into a “settlement account.” The settlement account
may pay for attorneys’ fees or finance consumer education
activities. For example, in August 2005, Warner-Lambert settled with several states in the alleged “off-label” marketing of
Neurontin®. A portion of the settlement funds—approximately
$15 million—was used to fund programs that educate physicians, pharmacists, and consumers about the drug approval
process.23 In the case of BuSpar®, Cardizem® CD, and Taxol®,
consumers who purchased those drugs were encouraged to
file claims to recover overcharges from the settlement funds,
premised on the fact that had the generic competitors entered
the market, consumers would have paid less.24
Injunctive relief also is a favored remedy. An injunction
prevents a party from engaging in specified activities for a
certain period of time. For example, as a result of its consent
decree with various states, Warner-Lambert was prevented
from making “any written or oral promotional claim of
safety or effectiveness” for off-label uses of Neurontin®.25
The length of time of the injunction depends on the wrongful
conduct alleged, with five years as the favored time period.
For instance, in addition to a monetary settlement in the
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Taxol® litigation, BMS agreed not to “claim that a Taxol
Patent is infringed by any drug product” for five years.26
Similarly, Mylan Labs was enjoined from entering into any
agreement “affecting commerce” with its co-defendants for a
five-year period.27
Conclusion
In theory, both parties to a settlement “win.” That is, the
government receives a sizable settlement fund and, in return,
the pharmaceutical corporation admits no liability. The
temptation to settle is even greater because settlement halts
the discovery process, thus preventing sensitive or confidential corporate information from being leaked to the public.
But settlement is not always the appropriate course of action,
especially when there is considerable disagreement over the
merits of substantive legal issues. Through careful balancing
of the issues at stake, and with appropriate legal guidance,
pharmaceutical companies can defend investigations by state
AGs both efficiently and effectively. FDLI
1
Patricia A. Conners, Current Trends and Issues in State Antitrust Enforcement, 16
LOY. CONSUMER L. REV. 37, 43 (2003).
2
Bill Trombetta, 2005 Industry Audit, PHARM. EXECUTIVE, Sept. 1, 2005, available at
http://www.pharmexec.com/pharmexec/article/articleDetail.jsp?id=177964&pageID
=1&sk=&date=.
3
See Jonathan Wilkenfeld & Judith Braun-David, 50 5 2005: Five Things You Can Do
to Prepare for Compliance in All 50 States—Starting Today, PHARM. EXECUTIVE, Sept.
1, 2005, available at http://www.pharmexec.com/pharmexec/content/printContentPopup.jsp?id=177963.
4
NAAG Home Page, www.naag.org/naag/about_naag.php (last visited Feb. 8, 2006).
5
Michael Brockmeye, Report on the NAAG Multi-State Task Force, 58 ANTITRUST L.J.
215, 216 (1989).
6
See ABA SECTION OF ANTITRUST LAW, STATE ANTITRUST ENFORCEMENT HANDBOOK 6
(2003); see also Crime Control Act of 1976, 42 U.S.C. § 3739 (1976) (repealed).
7
81 Civ. 1891 (S.D.N.Y. June 23, 1989). The proceeds from a settlement fund with
the dairy industry established the proceeds for the NAAG Settlement Fund.
8
See NAAG, NAAG Projects: Tobacco, http://www.naag.org/issues/issue-tobacco.php
(last visited Feb. 8, 2006).
9
New York v. Aventis S.A., MDL No. 1278, No. 01-CV-71835 (E.D. Mich. Jan. 29,
2003).
10
Alabama v. Bristol-Myers Squibb, MDL Nos. 1410 & 1413, No. 01-Civ. 11401
(S.D.N.Y. Mar. 7, 2003), available at http://www.naag.org/issues/20030307-multibuspar.php.
11
Ohio v. Bristol-Myers Squibb, Civ. No. 2:02 CV 01080 (EGS) (D.D.C. Apr. 24,
2003), available at http://www.abanet.org/antitrust/committees/state-antitrust/taxolsettlement.pdf; see also In re: Buspirone Antitrust Litigation v. Bristol-Myers Squibb
Co. et al., 2003 U.S. Dist. LEXIS 26538 (Apr. 2003).
12
See New York State Attorney General’s Office Prescription Drug Price Website
Home Page, www.nyagrx.org (last visited Feb. 8, 2006).
13
See Office of the Attorney General, Florida Prescription Drug Prices Home Page,
www.myfloridarx.com (last visited Feb. 8, 2006).
14
See Ohio Attorney General’s Prescription Information Website Home Page, www.
agrx.ag.state.oh.us/secured/Landing.aspx (last visited Feb. 8, 2006).
15
Class Action Fairness Act, Pub. L. No. 109-2, 119 Stat. 4 (Feb. 18, 2005).
16
NAAG, Forty-Six Attorneys General Urge Withdrawal of New Rule That Would Allow Destruction of CMS Pharmaceutical Pricing Data (Oct. 28, 2003), http://www.
naag.org/news/pr-20031028-cms_rule.php.
17
Alabama v. Bristol-Myers Squibb, MDL Nos. 1410 & 1413, No. 01-Civ. 11401
(S.D.N.Y. Mar. 7, 2003), available at http://www.naag.org/issues/20030307-multibuspar.php.
18
NAAG, Attorneys General Announce Availability of Grants Funded by 2004
FDLI
Settlement With Pfizer Division Over Improper Off-Label Drug Marketing (Aug.
31, 2005), http://www.naag.org/issues/20050831-neurontin.php; see also NAAG,
Settlement: Fifty Attorneys General Announce Settlement with Pfizer Over Improper
Off-Label Drug Marketing (May 13, 2004), http://www.naag.org/issues/20040513settlement-pfizer.php.
19
Press Release, State of Oregon Department of Justice, Oregon, FTC, & 30 Other
States Settle Lawsuits With Mylan Labs (July 12, 2002), http://www.doj.state.or.us/
releases/rel102302.htm (copy of settlement on file with the authors).
20
Id.
21
New Jersey Department of Law & Public Safety, Office of the Attorney General, Attorney General Announces Second Settlement in Contact Lens Suit (Feb. 20, 2001),
http://www.state.nj.us/lps/p10306o.htm.
22
STATE ANTITRUST ENFORCEMENT HANDBOOK, supra note 6, at 201.
23
NAAG, Availability of Grants Funded by 2004 Settlement With Pfizer, supra note
18; see also NAAG, Fifty Attorneys General Announce Settlement With Pfizer,
supra note 18.
24
See Conners, supra note 1, at 47 (stating that “the terms of the [Aventis] settlement
permit eligible purchasers of . . . Cardizem CD, to make claims to recover any
overcharges.”); see also Press Release: Maryland Attorney General, Settlement of
Prescription Drug Antitrust Suit Announced, Consumer Funds Could Reach $200$300 (Mar. 7, 2003), http://www.oag.state.md.us/Press/2003/030703.htm (“Upon
providing proof of their [BuSpar] purchases during the notice period, consumers
should receive full financial compensation for their damages.”).
25
See In the Matter of Warner-Lambert Company LLC: Assurance of Voluntary Compliance, § III, ¶¶ 6-7 (May 11, 2004), available at http://www.abanet.org/antitrust/
committees/state-antitrust/cp/warner-lambert.pdf.
26
See Settlement Agreement Between Plaintiff States and Bristol-Myers Squibb
Company Regarding Taxol (Apr. 24, 2003), available at http://www.dcd.uscourts.
gov/02-1080a.pdf.
27
See Settlement Agreement Between Plaintiff States, the Federal Trade Commission
and Mylan Laboratories, Inc., Gyma Laboratories of America, Inc., Profarmaco
S.R.L., Cambrex Corp. (July 2002) (copy on file with the authors).
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