Insurers May Pursue RICO Claim Over GSK's Avandia Marketing

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By Julie A. Steinberg

Oct. 27 — A new Third Circuit decision saying three health insurers have standing to pursue federal racketeering claims over GlaxoSmithKline's alleged deceptive marketing of Avandia “makes RICO a more important tool for challenging institutional misconduct,” an attorney for the plaintiff insurance funds says.

The U.S. Court of Appeals for the Third Circuit said Oct. 26 that the insurance funds adequately alleged they suffered a concrete economic injury by asserting that the maker's misrepresentations about Avandia's heart-related risks caused them to pay too much for the diabetes drug for their insured patients.

The plaintiff funds' allegations also satisfied the causation requirement of the Racketeer Influenced and Corrupt Organizations Act, Judge Jane Richards Roth said, allowing the proposed class suit to proceed.

“The conduct that allegedly caused plaintiffs' injuries is the same conduct forming the basis of the RICO scheme alleged in the complaint,” the court said. “We conclude therefore that plaintiffs' alleged injury is sufficiently direct to satisfy the RICO proximate cause requirement at this stage.”

Roth affirmed a lower court decision that denied GSK's motion for dismissal.

Company Vows Strong Defense

“GSK is disappointed with the Third Circuit’s decision and we intend to vigorously defend our position,” the company said in a statement e-mailed to Bloomberg BNA Oct. 27.

“GSK believes that health insurers do not have a valid cause of action when patients who benefitted from a medicine do not allege any adverse effects.”

Professor Samuel Issacharoff, an attorney for the funds, told Bloomberg BNA that ever since the U.S. Supreme Court's decision in Bridge, there has been “some ferment regarding how to prove standing in RICO suits.”

Defendants have been advocating heightened pleading standards, requiring reliance or specific impact, he said. “The Third Circuit finds this isn't required under RICO.”

In Bridge v. Phx. Bond & Indem. Co., 553 U.S. 639 (2008), the Supreme Court said if there is a sufficiently direct relationship between the defendant's wrongful conduct and the plaintiffs' injury, a RICO plaintiff who didn't rely on a defendant's misrepresentation can still establish proximate causation, the opinion here said.

“The Third Circuit was trying to find a workable solution” regarding the relationship between the plaintiffs and the alleged harm, said Issacharoff, who argued the case for the funds. And the court “did so, fully in accordance with the Bridge case.”

The opinion was a broad opinion, setting standards for RICO liability, Issacharoff, who is the Bonnie and Richard Reiss Professor of Constitutional Law at the New York University School of Law, said. “The importance goes beyond a motion to dismiss.”

Approval in 1999

The Food and Drug Administration approved Avandia in 1999. Concerns regarding heart-related side effects surfaced soon after the drug was introduced.

The Allied Services Division Welfare Fund, UFCW Local 1776 and Participating Employers Health and Welfare Fund, and United Benefit Fund sued GSK on behalf of themselves and other third-party payors (TPPs), which include insurers and others that reimburse and manage health care expenses.

The funds asserted that GSK's failure to disclose Avandia's heart-related risks violated RICO. They alleged GSK deliberately concealed the safety risks and promoted Avandia as a safer treatment for diabetes despite the known risks of heart attack and disease.

The drug maker's misrepresentations about the drug's heart-related risks, the plaintiffs alleged, caused the funds to believe Avandia had a better safety profile and place it in a preferred part of the “formulary” of drugs approved for coverage, which meant they covered costs for the diabetes drug at a higher rate.

GSK sought dismissal, arguing in part the funds failed to adequately allege standing.

Judge Cynthia M. Rufe of the U.S. District Court for the Eastern District of Pennsylvania, who is overseeing multidistrict litigation over Avandia, denied the motion. Her decision was certified for interlocutory review.

Concrete Injury Alleged

Section 1964(c) of RICO requires a plaintiff to show “injury to business or property,” the appeals court said, and the funds adequately alleged such an injury—a concrete financial loss.

The court rejected GSK's argument that the funds' harm was speculative because it was based on the possibility that future events might occur, namely that the drugs purchased by the funds would prove to be unsafe or ineffective.

The funds alleged an economic injury independent of any physical injury suffered by Avandia users, the court said.

Causation Satisfied

The court also said the funds' allegations satisfied RICO's proximate causation requirements.

The Supreme Court has found proximate cause lacking in RICO cases when the conduct directly causing the harm was distinct from the actions that gave rise to the fraud, the opinion here said.

But this case is more analogous to Bridge than to cases where the Supreme Court held that the conduct causing plaintiffs' injuries was different from the conduct allegedly constituting a RICO violation, the Third Circuit said.

The plaintiffs in Bridge were bidders at a county tax lien auction who alleged they were directly harmed by other bidders' fraudulent scheme to win more bids at the auction.

Here, the court rejected GSK's argument that the physicians who prescribed the drug and patients who used Avandia interrupted the causal chain between its representations about Avandia and the funds' coverage and reimbursement policies.

“Plaintiffs allege that drug manufacturers are well aware that TPPs cover the cost of their drugs and describe the alleged RICO scheme as consisting of ‘deliberately misrepresenting the safety of Avandia so that Plaintiff and members of the Class paid more for this drug.'” the court said.

“This scheme could have been successful only if the funds paid for Avandia, and this is the very injury that plaintiffs seek recovery for,” the opinion said.

Issacharoff of the New York University Law School in New York represented the funds.

John H. Beisner of Skadden Arps, Slate, Meagher & Flom in Washington argued the appeal for GSK.

To contact the reporter on this story: Julie A. Steinberg in Washington at jsteinberg@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

The opinion is at http://www.bloomberglaw.com/public/document/In_re_Avandia_Mktg_Sales_Practices__Prods_Liab_Litig_GlaxoSmithKl.