Introduction

Beset by ever-escalating health care costs and staggering budget deficits, states are increasingly resorting to tort actions against pharmaceutical manufacturers to recover the cost of Medicare payments made by them to pharmacies and other providers of prescription drugs. Most of these cases center on the charge that, because of some allegedly wrongful conduct on the part of drug companies – e.g., improper marketing and promotion, or off-label sales of their products – state Medicaid programs paid far more to reimburse pharmacies than they should have. Often suing in a parens patriae capacity, these states typically seek recovery of alleged “excess” or “non-medically necessary” Medicaid payments, statutory civil penalties, punitive damages, and other alleged economic losses – frequently in the hundreds of millions, or even billions, of dollars. And, increasingly, such cases are litigated not by state attorneys general, charged with protecting the interests of all of their states’ citizens, but by contingent fee counsel intent on maximizing monetary recovery for the state and, thereby, themselves.

Lost on these states and their contingent fee counsel – but not, fortunately, on the courts – is the irreconcilable conflict between the pecuniary interests of contingent fee attorneys hired to prosecute these cases and the states’ obligations to protect the health of their citizens, especially those dependent on Medicaid for satisfactory health care. States, patients and taxpayers all share a strong interest in assuring the availability of Medicaid-eligible medicines that enhance the health and well-being of their users, prevent more debilitating disease and illness, and allow many physically and emotionally impaired individuals to lead normal, productive lives. Unfortunately, in their quest to maximize damages and attorneys’ fees, states and their contingency fee counsel all too often assume litigation tactics that undermine these crucial public interests.

This article focuses on two recent court decisions, and a third case where a decision is pending, involving tort claims brought by states represented by contingent fee counsel against pharmaceutical companies for Medicaid reimbursement. Although the propriety of the contingency fee agreement is not at issue in every case, the courts’ rulings leave little doubt but that contingent fee counsel’s economic interests in the outcome of the litigation are often directly at odds with state-declared public policy and the health and welfare of the state’s citizens – a conflict that warrants a much closer look at contingent fee agreements in such cases.

The Escalation of Tort Claims by States Against Drug Companies for Medicaid Reimbursement

Without doubt, tort suits by states against pharmaceutical manufacturers to recover states’ Medicaid reimbursements to pharmacies, based upon manufacturers’ marketing and sales of their products, are on the increase. In the Vioxx® litigation, for instance, numerous states have sued Merck & Co. to recover monies paid by state Medicaid programs to pharmacies and other health care providers for reimbursement of Vioxx® prescriptions. ¹ More than 40 states have sued Eli Lilly & Company, the manufacturer of Zyprexa®, for similar relief.²

The rationale for such suits is not difficult to understand. In the last decade, health care costs sustained by state Medicaid programs in general have skyrocketed, and much of the increase is attributable to brand-name prescription drugs. In particular, states have spent tens of millions of dollars on Medicaid reimbursement of so-called “blockbuster” medicines like Vioxx®. ³ Meanwhile, states are reeling from massive budget deficits and are increasingly desperate for new revenues without raising taxes. Drug companies are attractive litigation targets – the pharmaceutical industry is viewed with substantial disfavor by the public, but blessed with deep financial pockets. And if states can actually get their cases to a jury, the verdict potential is substantial; during 2008 alone, two Alabama juries returned verdicts totaling nearly $340 million against three manufacturers of brand-name pharmaceuticals.⁴

Equally unsurprising, in light of the foregoing, is the new-found attraction for such cases among the plaintiffs’ contingency fee bar. In recent years, an increasing number of plaintiffs’ firms have attempted to forge alliances with attorneys general across the nation to represent states in high-stakes consumer fraud, product liability, public nuisance and similar actions, often on a contingent fee basis.⁵ Though such agreements have come under harsh criticism by many commentators,⁶ for states and counsel alike the allure of the contingent fee contract remains substantial. For its part, the state purportedly bears none of the financial risk of prosecuting such a case but may reap a substantial reward if successful at trial or in settlement. And for counsel, though such suits are often high-risk ventures, the prospect of millions of dollars in attorneys’ fees can be irresistible – so much so that counsel are often willing to “pay for play” handsomely for the privilege of prosecuting state Medicaid recovery cases against pharmaceutical companies.⁷

The few courts that have adjudicated these cases on the merits have ultimately rejected the states’ claims.⁸ In the process, these decisions have revealed gaping conflicts of interest between the contingent fee counsel hired to prosecute these cases, state Medicaid policy, and the welfare of citizens dependent upon Medicaid for their health care. In particular, in their self-interested quest to maximize states’ monetary damages above all else contingency fee counsel have advanced arguments that if accepted would severely limit or deny altogether access to FDA-approved medicines by the states’ neediest citizens; rewrite state policy approving the use and reimbursement of these medicines; and, threaten the viability of state Medicaid programs altogether. These conflicts are illustrated in detail in the following paragraphs.

A Summary of Ethical/Professional Standards Applicable to Contingent Fee Counsel Representing Governmental Entities

In an excellent piece appearing elsewhere on nuisancelaw.com, David Axelrad and Lisa Perrochet offer a detailed treatment of the general ethical principles attendant to the representation of states and other governmental entities in tort litigation on a contingent fee basis.⁹ For the purposes of this article, a short summary of those principles suffices.

Prosecutors have long been held to professional standards of neutrality and the duty to seek justice on behalf of the public. As the United States Supreme Court emphasized in 1935:

The United States Attorney is the representative not of an ordinary party to a controversy, but of a sovereignty whose obligation to govern impartially is as compelling as its obligation to govern at all; and whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done.¹⁰

More recently, the Supreme Court has emphasized that a government attorney “wins its point when justice is done in [the] courts”¹¹ – not by winning the case, or by extracting the maximum recovery possible. The American Bar Association’s Model Code of Professional Responsibility sets forth the governmental attorney’s obligation not just to be an advocate, but also to seek justice and to represent the interests of the public as a whole:

This special duty [to seek justice] exists because: (1) the prosecutor represents the sovereign and therefore should use restraint in the discretionary exercise of governmental powers, such as in the selection of cases to prosecute; (2) during trial the prosecutor is not only an advocate but he also may make decisions normally made by an individual client, and those affecting the public interest should be fair to all . . . .¹²

The importance of governmental neutrality to our entire system of justice was neatly summarized by the California Supreme Court as follows:

Not only is a government lawyer’s neutrality essential to a fair outcome for the litigants in the case in which he is involved, it is essential to the proper function of the judicial process as a whole. Our system relies for its validity on the confidence of society; without a belief by the people that the system is just and impartial, the concept of the rule of law cannot survive.¹³

These standards have been held to apply not merely to governmental attorneys prosecuting criminal cases, but also to those representing the sovereign in civil matters. As stated in the American Bar Association’s Model Code of Professional Responsibility:

A government lawyer in a civil action or administrative proceeding has the responsibility to seek justice and to develop a full and fair record, and he should not use his position or the economic power of the government to harass parties or to bring about unjust settlements or results.¹⁴

Accordingly, government lawyers in civil proceedings are held to “higher standards than private lawyers” – they “have ‘the responsibility to seek justice,’ and ‘should refrain from instituting or continuing litigation that is obviously unfair.’”¹⁵ As one court put it, somewhat sarcastically, “a government lawyer has obligations that might sometimes trump the desire to pound an opponent into submission.”¹⁶"

When the sovereign retains private attorneys to represent its interests in criminal or civil proceedings, those private attorneys, too, are held to the same standard of neutrality.¹⁷" As the Supreme Court of California observed:

. . . [A] lawyer cannot escape the heightened ethical requirements of one who performs governmental functions merely by declaring he is not a public official. The responsibility follows the job; if [the private attorney] is performing tasks on behalf of and in the name of the government to which greater standards of neutrality apply, he must adhere to those standards.¹⁸

Even where private counsel is hired by a governmental entity merely to “assist” its in-house attorneys, rather than supplant them, private counsel is subjected to a heightened standard of responsibility to the public.¹⁹

This guarantee of neutrality is violated where governmental attorneys have a personal stake in the outcome of matters they are handling. As public officials, governmental attorneys “should not engage in activities in which [their] personal or professional interests are or foreseeably may be in conflict with [their] official duties.”²⁰ Or, as the United States Supreme Court has held, “a scheme injecting a personal interest, financial or otherwise, into the enforcement process may bring irrelevant or impermissible factors into the prosecutorial decision . . . .”²¹ Accordingly, contingency fee counsel’s financial interests in the outcome of litigation brought on behalf of a governmental entity, particularly where the litigation requires a balancing of several public interests, have been held to preclude any suggestion of neutrality.²²

Recent Cases Illustrating Conflicts of Interest Between Contingency Fee Counsel and State Health Care Policy

Two recent decisions arising out of suits brought by the Attorneys General of Mississippi and Alabama, and a third case currently pending in Pennsylvania, illustrate the conflicts of interest inherent in the contingent fee representation of states seeking to recover Medicaid pharmaceutical reimbursement payments from pharmaceutical companies.

A. Mississippi

In 1996, the FDA approved Zyprexa®, an atypical antipsychotic medication made and sold by Eli Lilly & Company, for use in the treatment of certain manifestations of schizophrenia; it subsequently expanded its approval of Zyprexa® for use by sufferers of bipolar disorder.²³ Zyprexa® proved to be very effective in the treatment of those diseases and has markedly improved the quality of life for millions of people worldwide.²⁴ In addition, to its FDA-approved uses, Zyprexa® has been widely prescribed “off-label” by physicians for treatment of a variety of other mental disorders, including dementia, Alzheimer’s disease, depression, delirium, personality disorders, and post-traumatic stress disorder.²⁵

After Zyprexa® was introduced into the marketplace, long-term studies and post-marketing reports suggested a possible association between Zyprexa® (and other drugs of the same class) and such side effects as weight gain, hyperglycemia, and diabetes.²⁶ As a consequence, in 2003 the FDA required a warning on the Zyprexa® label advising of the risks of hyperglycemia and diabetes²⁷ and raised additional concerns about the adequacy of the Zyprexa® product information in 2007.²⁸ Meanwhile, a federal investigation into Lilly’s off-label promotion and marketing of Zyprexa® culminated in Lilly’s January 14, 2009 guilty plea to federal criminal and civil charges.²⁹

In light of these developments, more than 40 states or their attorneys general brought actions against Lilly upon a variety of legal theories and seeking recovery of a variety of damages, mostly relating to payments made by states under their state Medicaid programs on account of Zyprexa®. Most were transferred to a pending MDL proceeding, MDL 1596, in the Eastern District of New York before Judge Jack Weinstein for consolidated pre-trial proceedings.³⁰ By mid-2009, virtually all of those cases had settled, with payouts proportionate to each settling state’s population.³¹ In addition, the civil settlement between Lilly and the federal government obligated Lilly to pay another $362 million to the settling states.³² Through these agreements, each settling state received tens of millions of dollars from Lilly.³³

Mississippi’s Attorney General, represented by contingent fee counsel, chose a different path. It rejected all settlements with Lilly and instead filed a separate suit claiming, inter alia, that:

• Every Zyprexa® prescription written in Mississippi – nearly one million of them – was the result of a “[prohibited] method, act or practice” by Lilly, i.e., its off-label marketing of Zyprexa®, thereby subjecting Lilly to civil penalties under the Mississippi Consumer Protection Act of up to $10,000 per prescription;³⁴
• Lilly’s off-label marketing and failure to warn of Zyprexa®’s side effects caused physicians to write Zyprexa® prescriptions that otherwise would not have been made, thus subjecting Lilly to additional civil penalties under the Mississippi Medicaid Fraud Control Act in the total amount of all monies paid by Mississippi for all off-label Zyprexa® prescriptions, plus treble damages;³⁵ and,
• Under Mississippi’s Product Liability Act, the State was also entitled to recover from Lilly all costs it spent to treat diseases, primarily diabetes, among state Medicaid recipients resulting from Zyprexa® use.³⁶

In contrast to the settlements made by the 40+ other states with Lilly in the tens of millions of dollars per state, Mississippi’s claimed damages ran in the billions of dollars.³⁷

On December 1, 2009, Judge Weinstein dismissed the majority of the Mississippi Attorney General’s claims against Lilly, including each of the claims identified above, on the basis that those claims could be supported only by individualized proof on a transaction-by-transaction basis, not by the aggregate proof Mississippi offered to support them.³⁸ Although the propriety of retaining contingent fee counsel to pursue the Attorney General’s claims was not formally before the Court, Judge Weinstein nonetheless cited as “other considerations” supporting his ruling the conflicting interests between Mississippi’s obligations to its taxpayers and Medicaid recipients and the positions taken by the Attorney General in court to bolster its damage claims:

. . . [T]he State’s role and responsibilities with respect to a widely prescribed medication like Zyprexa are worthy of consideration. The State of Mississippi . . . has obligations to taxpayers, a huge administration and supervisory bureaucracy, and contact with the medical and health professionals who administer and are employed by its Medicaid program. The State has a special opportunity, and, arguably, a special obligation to understand the benefits and dangers of widely prescribed drugs, including their appropriate off-label uses and potential adverse side effects, in order to effectively administer State programs and manage government expenditures.

Lilly . . . has created a product with substantial benefits that even now – after many years of litigation, research, testing, and controversy – is still favored by many physicians and patients in Mississippi and elsewhere for some of the most serious psychological conditions that afflict millions of people worldwide. Courts cannot ignore the substantial benefits accruing to the State of Mississippi and its citizens from the use of Zyprexa. The State arguably saved large sums through use of Zyprexa by preventing users with serious mental problems from requiring hospitalization in State facilities, and allowing them to become productive taxpayers and participants in the economy.³⁹

Judge Weinstein also noted that the concerns regarding Zyprexa® raised by the Attorney General in the litigation were evidently not shared by Mississippi’s Medicaid program: “Zyprexa continues to be approved and paid for by the State even after filing its claims for fraud and lack of efficacy.”⁴⁰ Finally, Judge Weinstein delivered a parting shot at Mississippi’s “slash-and-burn-style of litigation,” calling its effort to extract as much financial recovery as possible from Lilly “arguably . . . an abuse of the legal process”:

Under this constitutional fairness and equity standard, Mississippi’s requests for statutory penalties on a per-violation basis, in addition to actual damages sought, would result in a multibillion dollar cumulative penalty grossly disproportionate to both the injury Mississippi has suffered and the seriousness of Lilly’s alleged misconduct. (Citations omitted.)

If allowed to proceed in their entirety, the State’s claims could result in serious harm or bankruptcy for this defendant and the pharmaceutical industry generally. (Citation omitted.)

For the legal system to be used for this slash-and-burn-style of litigation would arguably constitute an abuse of the legal process. Constitutional, statutory, and common law rights of those injured to seek relief from the courts must be recognized. But courts cannot be used as an engine of an industry’s destruction.⁴¹

Judge Weinstein’s observations are a clear rebuke to a litigation strategy that, if successful, would have denied tens of thousands of Mississippians access to a safe, effective and enormously beneficial prescription drug. It is one thing for Mississippi administrators and policymakers, charged with balancing the health and welfare of the state’s citizens against the interests of taxpayers and state finances, to elect to limit the availability of Medicaid-eligible medications to Mississippi’s indigent. It is something else entirely when contingent fee litigation counsel, with a financial stake in the outcome, makes that call.

B. Alabama

“Medicaid provides ‘joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs.’”⁴² In general terms, under Medicaid individual states may elect to reimburse medical providers for the costs of health care provided by them to indigent persons; states that create such programs, if in conformity with federal requirements, will in turn receive repayment from the federal government of a majority of those expenses.⁴³ States operating Medicaid programs must establish a federally-approved methodology that determines the reimbursement payments to be made to eligible health care providers, such as pharmacies; generally speaking, reimbursement payments may be based upon either (1) what the provider actually paid for each drug, or (2) an estimated cost to the provider based upon statistical analysis of manufacturers’ pricing data.⁴⁴ Though different states may use different reimbursement methodologies, in every case the underlying policy goal is the same: “to produce a payment rate sufficient to encourage providers to participate in the Medicaid program, while, at the same time, minimizing Medicaid costs.”⁴⁵

Most state Medicaid programs, with the approval of the federal government, base their reimbursement methodologies upon pricing data supplied by drug manufacturers to a national pharmaceutical price compendium. Manufacturers report the prices they charge wholesalers for their products, known as the “wholesale acquisition cost” (“WAC”); the compendium, in turn, computes an “average wholesale price” (“AWP”) for each drug based upon the manufacturer’s WAC data and forwards both the WAC and AWP figures to third-party payors, state Medicaid programs, and others. State Medicaid programs then determine reimbursement payments to health care providers utilizing one or more formulas incorporating the AWP and/or WAC costs.

In January, 2005, the State of Alabama, represented by contingent fee counsel, sued 73 pharmaceutical manufacturers in a single complaint, claiming that the companies uniformly provided or caused to be provided “false and inflated” AWP and WAC information to a price compendium, with the result that the AWPs and WACs reported to the Alabama Medicaid program (and everyone else) “greatly exceeded the actual prices at which [the manufacturers] sold their drugs to retailers and wholesalers.”⁴⁶ In particular, according to the Alabama complaint, the manufacturers failed to report that the AWP and WAC figures did not incorporate discounts, rebates and other price savings actually provided by the manufacturers to wholesalers and retailers. Thus, when the Alabama Medicaid program reimbursed providers based upon AWPs – Alabama’s general reimbursement formula was AWP minus 10.2% – it allegedly overpaid those providers because the AWP figures were purportedly inflated above actual costs.⁴⁷ Asserting that the manufacturers knew that the AWP and WAC data was falsely inflated, Alabama brought claims based on fraud and misrepresentation and sought compensatory and punitive damages against each pharmaceutical manufacturer.⁴⁸

Alabama’s claims against each of the 73 manufacturers were ultimately severed from one another, and several of the individual actions went to trial. In the first case to reach trial, against AstraZeneca, the jury returned a verdict in favor of the State and awarded $40 million in compensatory damages and $175 million in punitive damages.⁴⁹ The second trial, against Novartis Pharmaceuticals Corp. (“Novartis”) and Glaxo SmithKline (“GSK”), resulted in compensatory awards of $33,257,694 against Novartis and $80,989,539 against GSK; no punitive damages were assessed against either defendant.⁵⁰

On appeal, AstraZeneca, Novartis and GSK all argued that the evidence at trial showed that the Alabama Medicaid program knew full well that the AWP figures from which it calculated reimbursement payments to providers did not include discounts, rebates or other incentives given to retailers and wholesalers, which is precisely why the Alabama Medicaid program’s reimbursement payments to health care providers were based upon the AWP price, less 10.2%. Accordingly, so defendants argued, Alabama could not possibly have relied upon the manufacturers’ allegedly over-inflated AWP and WAC data – an essential element of Alabama’s fraud claims.⁵¹

The Alabama Supreme Court agreed with the manufacturers and reversed the jury verdicts. According to the court, the trial evidence demonstrated unequivocally that the Alabama Medicaid program knew that the AWP figures it relied upon to reimburse providers failed to incorporate discounts and rebates and therefore did not reflect the actual price of prescription drugs charged to retailers and wholesalers.⁵² Indeed, the Supreme Court found, the fact that Alabama discounted the AWP by 10.2% when making its reimbursement payments irrefutably demonstrated the State’s knowledge that AWP is not a “net” figure and does not incorporate the discounts and rebates given to pharmacies and other providers.⁵³ Moreover, the court observed that, even after it learned that the manufacturers’ AWP and WAC data was purportedly inflated, Alabama made no changes to its reimbursement methodology – again disproving any claim of reliance upon the manufacturers’ data.⁵⁴

The Supreme Court went on to consider the ramifications of Alabama’s contention that it believed AWP data to reflect actual acquisition paid by pharmacies for prescription drugs. The court reasoned that if, as Alabama claimed in the litigation, AWP prices represented pharmacies’ actual costs, including discounts, then Alabama’s reimbursement formula (AWP minus 10.2%) guaranteed that pharmacies would lose money on every Medicaid prescription they filled – thereby forcing pharmacies to end their participation in Alabama’s Medicaid program, and threatening the viability of the entire program.⁵⁵ Moreover, the court concluded, reimbursing health care providers at 90% of their actual acquisition cost would violate federal law.⁵⁶ Thus, according to the Supreme Court,

. . . the State’s argument that it believed the published AWPs to represent actual AWPs is simply untenable. On the contrary, it is clear beyond cavil that the reimbursement methodology adopted by the [Alabama Medicaid Program] is the product of a conscious and deliberate policy decision, which seeks to “balance (i) the amount [it] reimburse[s] pharmacies that dispense drugs to Medicaid patients, and (ii) the requirement – established by federal law – to set reimbursements sufficiently high to ensure participation in the Medicaid program by retail pharmacies.” (Citation omitted.)

Thus, we agree with AstraZeneca when it contends that this litigation is essentially an “attempt to use tort law to re-define [the Alabama Medicaid Program’s] Medicaid reimbursement obligations.” (Citation omitted.) Such regulation by litigation raises, of course, serious questions of federal preemption and supremacy, none of which we address here. However, given the State’s particularized knowledge of the challenged reporting practices, a claim of common-law fraud – with its element of reasonable reliance – is, like the proverbial “square peg in a round hole,” particularly ill-suited for the task to which it was put in this dispute.⁵⁷

One may fairly presume that Alabama did not intend to throw the State’s entire Medicaid program under the wheels of its litigation bus. Yet, if the State and its contingency fee counsel had actually succeeded in their arguments, the ramifications to Alabama’s Medicaid program, and the tens of thousands of Alabamans dependent upon Medicaid for their health care coverage, could have been devastating. Decisions as to how Alabama’s health care providers should be reimbursed for Medicaid-eligible prescription medications should be made by Alabama’s elected officials and fiscal and health care administrators – not by financially-interested contingent fee lawyers with a dog in the hunt.

C. Pennsylvania

In 2005, a Houston, Texas plaintiffs’ law firm, Bailey Perrin, approached Pennsylvania Attorney General Tom Corbett with a proposition: that General Corbett file suit against the manufacturers of three atypical anti-psychotic drugs to recover the Commonwealth’s Medicaid payments for those drugs and, as part and parcel, hire Bailey Perrin on a contingent fee basis to prosecute such a suit. According to a published report, the Attorney General “was not impressed with the presentation [Bailey Perrin] made, or the evidence [Bailey Perrin] presented” and declined Bailey Perrin’s magnanimous offer.⁵⁸

Undaunted, Bailey Perrin took its case to Pennsylvania Governor Ed Rendell. This time, though, Bailey Perrin put its money where its mouth was – during the spring and summer of 2006 while the Governor’s Office of General Counsel (“OGC”) and Bailey Perrin were privately negotiating a possible representation, one of Bailey Perrin’s founding partners, F. Kenneth Bailey of Houston, made contributions of $59,200 to Governor Rendell’s re-election campaign, and another $25,000 to the Democratic Governors’ Association (which donated over $1 million to Gov. Rendell’s 2006 campaign).⁵⁹

The OGC and Bailey Perrin ultimately settled on the terms of a contingency fee deal and signed a written agreement in August, 2006 – after which Mr. Bailey donated another $32,000 to Gov. Rendell’s campaign.⁶⁰ The OGC neither opened the possible representation of the Commonwealth for bidding by or otherwise sought proposals from other law firms, nor sought legislative authorization to engage outside contingency fee counsel to pursue litigation on the Commonwealth’s behalf. Moreover, except for delegating its authority to enter into a contingency fee contract on behalf of Pennsylvania to the OGC, the Attorney General had no role in the process.⁶¹

Under the contingency fee agreement between Bailey Perrin and the OGC, Bailey Perrin will receive 15% of any monetary judgment or settlement recovered by the Commonwealth.⁶² The agreement also requires Bailey Perrin to advance all costs and expenses of prosecuting a lawsuit, with repayment contingent upon a monetary recovery.⁶³ Thus, the Commonwealth has little if any of its own funds at risk. However, it has little control over the litigation as well. By the terms of the agreement, OGC is expressly prohibited from accepting any non-monetary settlement offer “unless the settlement also provides reasonably for the compensation of [Bailey Perrin] by the Defendants to the litigation for the services provided by [Bailey Perrin] under this Contract.”⁶⁴ Furthermore, absent from the contingent fee contract is any language requiring OGC to maintain and exercise control over the litigation, as was standard in contingent fee contracts drafted by the Pennsylvania Attorney General; rather, the agreement only requires Bailey Perrin to “consult with” OGC and to deal with it as any other client.⁶⁵

With contingent fee counsel in hand – or perhaps vice versa – in February, 2007 the Commonwealth through OGC brought suit against three manufacturers of atypical antipsychotics. The complaint was not signed by any OGC lawyer and was “verified,” not by any Commonwealth officer or employee, but by a Bailey Perrin attorney.⁶⁶

After the trial court split the case into separate actions against each defendant, in January, 2008 the Commonwealth and OGC filed a new complaint against one of the three, Janssen Pharmaceutica, Inc. – again not signed by any OGC lawyer, and “verified” only by the same Bailey Perrin attorney⁶⁷ – which became the operative complaint in the case. Ostensibly brought by the Commonwealth “as sovereign” in the form of a parens patriae action on behalf of all Pennsylvania Medicaid and state Pharmaceutical Assistance Contract for the Elderly (“PACE”) participants, the complaint alleged that Janssen fraudulently marketed and promoted its drug Risperdal® for off-label uses which, according to the complaint, were not “medically necessary” for purposes of Medicaid and PACE reimbursement. Indeed, according to the Commonwealth, all prescriptions of Risperdal® – without exception – “were written for non-medically necessary uses.”⁶⁸ Accordingly, the Commonwealth sought, inter alia, reimbursement of all Medicaid and PACE expenditures for Risperdal® and civil penalties of $10,000 for each off-label Risperdal® prescription.⁶⁹

In contrast to OGC’s and its contingency fee counsel’s claim that all Risperdal® prescribed in Pennsylvania was for “non-medically necessary” uses, the Pennsylvania Medicaid program has taken a different view. At the time the lawsuit was commenced, the Pennsylvania Department of Public Welfare listed Risperdal® as a “preferred” product, i.e., “determined . . . to be the best in a particular class based on: clinical effectiveness, safety and outcomes.”⁷⁰ Additionally, the National Association of State Mental Health Program Directors has also approved a policy statement recognizing that Risperdal® and other atypical antipsychotics are widely used off-label for treatment of a wide variety of mental disorders.⁷¹ Accordingly, OGC’s claim that all Risperdal® uses in Pennsylvania were “non-medically necessary,” and hence should not have been reimbursed by the Pennsylvania Medicaid or PACE programs, would arguably effectively deny to Pennsylvania’s indigent a medication available to more affluent users and which provides great benefit to persons suffering from schizophrenia and other psychoses.

In June, 2008, Janssen moved to disqualify Bailey Perrin on a variety of constitutional and statutory grounds, based both upon the process (including but not limited to the “pay to play” aspects) by which Bailey Perrin was retained, and conflicts of interest between contingency fee counsel and the Commonwealth relative to Risperdal® availability and off-label use by Medicaid recipients. That motion was denied by the trial court in December, 2008.⁷² Janssen successfully applied for extraordinary relief from the Supreme Court of Pennsylvania,⁷³ and the matter is currently pending before the Pennsylvania Supreme Court.⁷⁴

Observations

These cases vividly illustrate the complex and often competing public policies faced by states contemplating recoupment of their Medicaid drug reimbursements, and how contingency fee agreements can skew the pursuit of those policies. States have a legitimate interest in preventing alleged Medicaid fraud and seeking new sources of revenue to reduce massive state budget deficits – though, as the Mississippi and Alabama decisions suggest, suing pharmaceutical manufacturers to recover Medicaid reimbursements to pharmacies may not be the most fruitful avenue to pursue. Regardless, states also have other vital concerns: promoting the health and welfare of their neediest citizens through low- or no-cost access to safe and effective medicines; protecting taxpayers against the fiscal impacts of treatable and preventable disease; and, encouraging all health care providers, including physicians, hospitals and pharmaceutical and medical device manufacturers, to provide quality health care services and products at affordable prices. Many of these interests are diametrically opposed to one another – e.g., enriching the state treasury through multi-million dollar tort claims against drug manufacturers based on off-label use of FDA-approved medicines, with the risk that pharmacies will stop providing such medications to Medicaid patients on an off-label basis – and it is each state’s obligation to balance these competing concerns into an overall health care policy that best serves the interests of all its citizens. And states have a variety of tools available to them to accomplish that balancing, including tort claims, injunctive relief, administrative rule-making, legislation, compliance oversight, and executive authority.⁷⁵

By contrast, contingent fee counsel possess neither the breadth or diversity of interests of their state clients, nor the tools possessed by the state to advance them. Counsel’s interest is singularly and purely financial – to maximize the state’s damage recovery and, therefore, counsel’s contingency fees. By definition, that interest can be achieved only through litigation or the threat thereof – a truism that undoubtedly explains, in the Pennsylvania example described above, contingency fee counsel’s veto power over any non-monetary settlement that fails to provide for counsel’s attorney fees.⁷⁶ Furthermore, given the fact that contingent fee counsel typically advances the sizeable costs of prosecuting these cases, with repayment contingent on the outcome, counsel has even less of an interest – if such is possible – to advocate or accept a non-monetary solution to the litigation.

One commentator has described the divergence of interests between states and other governmental entitles, and contingent fee lawyers retained to represent them, in the following terms:

Sometimes public interest considerations dictate dropping litigation altogether or focusing on nonmonetary relief more than monetary relief. But contingency fee lawyers, perhaps unlike most government lawyers or even most outside hourly fee lawyers, arguably can be expected to pursue the maximum monetary relief for the state without adequately considering whether that relief advances the public interest and/or whether the public interest would be better served by foregoing monetary claims or some fraction of them, in return for nonmonetary concessions.⁷⁷

Given these conflicts, it is hardly surprising that, in the Mississippi and Pennsylvania cases described above, those States and their contingent fee counsel advanced arguments that, though intended to boost those states’ potential damages, are arguably in the worst interests of Medicaid recipients who rely upon off-label prescriptions to protect their health. Nor should one be surprised by Alabama’s attempt to bolster its damages claim with an argument that, as the Alabama Supreme Court found, threatened to undermine health care providers’ willingness to participate in the State’s Medicaid program. Contingency fee counsel has neither the tools nor the incentive to balance these competing public policy considerations; they are, instead, bound to pursue the solution that promises the highest damage recovery, to the exclusion of all else.

For states intent on pursuing Medicaid reimbursement tort actions against drug manufacturers, ample alternatives to the conflict-laden contingency fee relationship exist. Many state Attorneys General, in part on account of these conflicts, simply decline to entrust to contingency fee counsel their states’ public policy and instead pursue such actions with state personnel.⁷⁸ Retaining outside counsel on an hourly fee, fixed-fee or other non-contingent basis to prosecute these claims also eliminates any threat that the course of the litigation will be hijacked by counsel’s financial stake in the outcome. In both situations, states are free to pursue strategies and solutions that serve the best interests of the citizenry as a whole, without regard to whether counsel will be paid for their efforts.

Regardless, the Mississippi, Alabama and Pennsylvania cases prove that, despite the allure of “no risk, high reward” litigation, states hoping to recover their costs of Medicaid drug reimbursement through litigation against pharmaceutical manufacturers may find their public policy interests compromised by contingency fee counsel intent upon maximizing their clients’, and their own, financial recovery. Such arrangements, it is respectfully submitted, fail to serve the best interests of the states that bring such actions, the Medicaid programs they administer, and the citizens they are sworn to protect. State Attorneys General who may be considering similar suits would be well advised to carefully review the inherent conflicts of interest presented by contingent fee agreements, as shown by the Mississippi, Alabama and Pennsylvania cases, and decline contingency counsel’s offers of a free lunch.

author: Scott Smith