Opinion

Alison Frankel

3rd Circuit shocker: Pay-for-delay drug settlements are illegal

Alison Frankel
Jul 17, 2012 16:28 UTC

Judge Richard Posner of the 7th Circuit Court of Appeals, who has lately emerged as a persuasive critic of the U.S. patent system, believes patents are stifling innovation in this country, conferring unwarranted power on inventors who spend very little money to develop their creations. The one industry Posner exempts from this general rule is the brand-name pharmaceutical business, which he described in the Atlantic as “the poster child for the patent system.” He gave three reasons why drug companies need patent protection: New drugs cost millions of dollars to develop; drugmakers don’t get to earn money from their inventions for the entire life of the patent because it takes years of post-patent testing to bring a new product to market; and it’s cheap to copy drugs once someone else has invested heavily in developing them. Without patents, Posner wrote, drug developers would never recoup their costs.

Posner, however, has never had to decide a pay-for-delay case, which pits the interests of brand-name drugmakers against the interests of consumers who want to pay less for generic medications. On Monday, the 3rd Circuit Court of Appeals issued a shocker of a ruling in a pay-for-delay case against Schering-Plough (now owned by Merck). The three-judge appellate panel split with three other federal circuits and held that when a brand-name drug manufacturer pays a generic rival to drop its challenge to the brand-name drug patent, the settlement is prima facie evidence of an illegal restraint of trade. The decision throws down the gauntlet on the legality of pay-for-delay settlements, increasing the likelihood that the U.S. Supreme Court will have to take up the issue.

The controversy over pay-for-delay pharma settlements has been simmering for decades, since Congress attempted to balance the needs of brand-name drug manufacturers with the needs of consumers, who want access to cheaper generics, in the Hatch-Waxman Act of 1984. Hatch-Waxman established a regulatory framework for generics to bring their products to the market by filing new drug applications with the Food and Drug Administration, then litigating with brand manufacturers over the validity of brand-name patents. But lawmakers were quickly outsmarted by drug companies, which realized they could prolong their monopolies by paying generics to drop litigation over the validity of their patents. According to the Federal Trade Commission, which has spent years fulminating about these so-called reverse payment, or pay-for-delay settlements, the deals cost American consumers something like $3.5 billion a year.

And one of the worst things about pay-for-delay settlements, in the eyes of the FTC, is that they have the blessing of the federal judiciary. After a couple of early rulings in which federal circuit courts called pay-for-delay settlements an illegal restraint of trade, the 2nd Circuit Court of Appeals, in a landmark 2004 opinion called In re Tamoxifen Citrate Antitrust Litigation, said reverse-payment deals do not violate antitrust laws. The 2nd Circuit set forth what has become known as the “scope of the patent” test, holding that such settlements are not anticompetitive as long as they don’t block generics from entering the market after the brand-name manufacturer’s patent rights expire (and as long as the patent wasn’t fraudulently obtained). The FTC and antitrust plaintiffs fought in vain for a reversal of the Tamoxifen ruling, including an unsuccessful petition for certiorari at the U.S. Supreme Court. Instead, the 2nd Circuit confirmed the scope-of-the-patent test in a subsequent pay-for-delay antitrust case, this one involving the antibiotic Cipro. The federal and 11th circuits, meanwhile, adopted the same scope-of-the-patent reasoning.

One of the 11th Circuit rulings upholding the legality of a pay-for-delay deal came in the FTC’s challenge to settlements Schering-Plough reached with two generic manufacturers that filed applications to make versions of the drug K-Dur, a potassium chloride supplement used to treat side effects from blood pressure medication. The FTC claimed the settlements were an illegal restraint of trade that improperly preserved Schering’s monopoly on the drug. In 2005, the 11th Circuit reversed the agency, holding that the agreements were permissible because they didn’t exceed the scope of Schering’s patent.

Judge bars new complaint in GE securities megacase for ‘bad faith’

Alison Frankel
Jul 13, 2012 23:16 UTC

The great thing for plaintiffs about claims under the Securities Act of 1933 (as opposed to the Exchange Act of 1934) is that you usually don’t have to show that defendants intentionally misled investors. The Securities Act carries strict liability for factual misstatements in offering documents, so plaintiffs get to slip under the high bar for establishing fraud.

There’s an exception, however, for statements that are deemed to be opinions. To proceed with Securities Act claims based on opinions in offering materials, investors do have to establish that the speaker (typically the corporation raising capital) knew the opinions were false. The 2nd Circuit Court of Appeals confirmed that distinction in August 2011 in a ruling called Fait v. Regions Financial, which held that, to be actionable under the Securities Act, opinions must falsely represent the speaker’s beliefs at the time they were expressed.

The carve-out for opinions puts investors with Securities Act claims in a bit of a pickle. Their best option is to disclaim assertions that misstatements were intentional, since then they don’t have to offer detailed allegations of fraud in their complaints. But if the statements are eventually determined to be opinions, plaintiffs risk having their cases dismissed because they’ve disclaimed the speaker’s knowledge and intent.

Barclays hit with Libor securities class action

Alison Frankel
Jul 13, 2012 05:02 UTC

There’s a new entry in the category of no-brainers: A holder of Barclays American Depository Receipts has brought the first of what is sure to be a string of Libor-related securities fraud class actions. The 47-page complaint, filed by Wolf Haldenstein Adler Freeman & Herz in federal court in Manhattan, asserts that Barclays and its former CEO, Bob Diamond, and outgoing chairman, Marcus Agius, lied to shareholders when they failed to disclose the bank’s manipulation of reports to the authorities who calculate the daily London interbank offered rate (or Libor), a benchmark for short-term interest rates.

Barclays told shareholders that it was a model corporate citizen even though since at least 2007 it was “participating in an illegal scheme to manipulate rates in a way that would allow defendants and other bankers to exploit the market,” the complaint asserted. On the day Barclays’ settlements with U.S. and British financial regulators were announced, the complaint said, the price of its ADRs fell 12 percent; the next day the ADRs tumbled an additional 5 percent. (If you’re wondering why the complaint was filed by ADR holders, it’s because Morrison v. National Australia Bank bars claims in the United States by common stockholders in the British-listed bank.)

Barclays obviously has far bigger problems than a securities class action, what with Libor hearings in Parliament, talk of criminal actions, and billions of dollars in potential exposure in a Libor antitrust class action that’s already under way in federal court in Manhattan, plus the recently filed antitrust class action based on Barclays’ admitted manipulation of the European interbank offered rate.

Eminent domain, MBS and the U.S. Constitution: A one-sided fight?

Alison Frankel
Jul 11, 2012 23:55 UTC

If you’re already inclined to suspect governments of overreaching, boy will you hate the plan San Bernardino is contemplating.

About half of the homeowners in the newly bankrupt California city are underwater, which means they owe more on their mortgages than their homes are worth. In conjunction with a San Francisco outfit called Mortgage Resolution Partners, San Bernardino is considering a plan to exercise eminent domain and seize mortgage liens on some of those underwater homes. As my Reuters colleagues Matt Goldstein and Jennifer Ablan were the first to report, the eminent domain scheme works like this: With financing from an outside operation such as MRP, the city would condemn underwater mortgages and purchase them in the name of the public good for a court-determined fair market price. The financier would then make new mortgage loans to homeowners under modified terms before turning around and selling the modified loans to outside investors. As eminent domain proponents describe the plan, it’s a winner for everyone: Homeowners see their loan principal reduced and get to keep their houses, financiers turn a profit on the resold mortgages and the city avoids the blight of foreclosed homes, which drive down property values and destroy neighborhoods.

But there are also losers in the eminent domain model: investors in mortgage-backed securities. San Bernardino is talking about exercising eminent domain only over mortgage loans that have been bundled into private securitizations. Those mortgages are owned by MBS trusts, which, under eminent domain, would be forced to accept fair market value for underlying loans they don’t want to sell. To add insult to injury, the San Bernardino plan proposes that only performing loans be part of the initial wave of eminent domain seizures. That’s to reward homeowners who have managed to live up to their mortgage obligations. But from the perspective of MBS investors, seizing loans that are still being paid on time means they’re being stripped of an ongoing revenue stream.

Accounting board drops call for beefed-up litigation risk disclosure

Alison Frankel
Jul 11, 2012 01:30 UTC

More than four years after the Financial Accounting Standards Board first proposed a stringent new standard for corporate disclosure of litigation loss contingencies, it voted Monday to drop the effort, citing increased scrutiny of litigation exposure by the Securities and Exchange Commission and the Public Company Accounting Oversight Board. The accounting rulemaker’s decision has to be considered a relief for public corporations, many of which have bitterly opposed the FASB’s litigation disclosure proposals as a gift to plaintiffs’ lawyers.

The controversy over exactly what corporations must say in their financial statements about potential litigation losses actually dates back to the 1970s, when accountants and defense lawyers compromised on a standard mandating the disclosure of a litigation contingency when there’s a “reasonable possibility” of a loss. The FASB – which is responsible for setting generally accepted accounting principles – eventually decided that there was too much wiggle room in the “reasonable possibility” standard. In 2008, the accounting board proposed new rules that called for corporations to disclose virtually all litigation exposure, including the company’s assessment of its maximum exposure. Defense lawyers, according to Eric Roth of Wachtell, Lipton, Rosen & Katz, read the proposal as a dangerous encroachment on privileged communications about litigation prospects. “You can’t adopt a rule that strips companies of attorney-client privilege,” Roth said. “That was seen as an attack on the adversary system.”

Michael Young of Willkie Farr & Gallagher, who has been talking to FASB board members about litigation contingency disclosure for years, said that if the 2008 proposal had been adopted, plaintiffs’ lawyers arguing for damages could simply have shown juries excerpts on maximum exposure from a defendant’s own financial statements. “To the FASB’s credit, it took the board about two minutes to understand the problem,” Young said.

Can shareholder activism affect corporate political spending?

Alison Frankel
Jul 10, 2012 17:03 UTC

The New York Times had a great front-page story on Sunday about corporations contributing to politically active non-profits in order to shield their campaign contributions from public view. That’s not a revelatory thesis – I’ve written about a suit by campaign-spending reformers to force such non-profits as Karl Rove’s Crossroads GPS to disclose corporate donors – but the Times dug deep for examples of specific corporate contributions, such as the $3 million that Aetna gave to the U.S. Chamber of Commerce, which was initially described in a regulatory filing as a “lobbying expense.”

Bruce Freed of the Center for Political Accountability read about Aetna’s donation to the Chamber with great interest. Aetna, you see, is one of more than 100 large public companies that have agreed in the last several years to disclose their political spending. Most of those disclosure agreements have come under pressure from shareholders, who (often with CPA’s help) have demanded proxy votes on resolutions calling for corporations not only to disclose their policies and procedures for political spending but also to itemize all contributions, direct or indirect, that are intended to influence an election or referendum.

These shareholder demands for disclosure have become increasingly common, thanks to the U.S. Supreme Court’s 2010 holding in Citizens United v. Federal Election Commission, which said indirect corporate political spending is protected by the First Amendment. (Direct spending, as we’ve reported, may be another story.) Forcing companies to own up to their political involvement “has become even more critical,” the CPA website says, because Citizens United means “companies face greater pressure to spend corporate dollars either directly or indirectly through conduits such as trade associations and [non-profits].”

Porn copyright troll targets strike back in new class action

Alison Frankel
Jul 6, 2012 22:20 UTC

Jennifer Barker of Louisville, Kentucky, insists she has never downloaded a pornographic movie from the Internet and has certainly never infringed anyone’s copyright through illegal porn downloading. So you can imagine her dismay when, according to a complaint filed Thursday by her lawyers at Henry & Associates, Barker was contacted in May by a woman asking her to settle an illegal porn-downloading claim that had been asserted against her in Florida. Barker was told that Internet records indicated she had downloaded several titles from the website X-Art, and that if she didn’t pay up she’d be subject to hundreds of thousands of dollars in judgments and would be publicly revealed as a porn downloader. When Barker refused, according to the complaint, she was harassed about the supposed claim, with messages left on her personal and work phones.

Barker is one of tens of thousands of people who’ve received settlement demands from porn movie producers and their lawyers in the last few years. As I’ve reported here, these piracy cases have become a flash point in copyright litigation. No one disputes the scourge of illegal downloading, but public interest advocates assert that piracy cases in which porn producers and their lawyers sue thousands of unknown downloaders at a time are more akin to extortion than litigation. The copyright holders aren’t really interested in protecting their rights, according to Public Citizen and the Electronic Frontier Foundation. They’re interested in scaring accused downloaders into forking over a couple thousand dollars apiece to make the accusations go away. The public interest groups assert that even people like Barker, who say they never downloaded illegal porn, often assume it’s cheaper and easier to pay the settlement than to hire a lawyer and defend the litigation.

Barker did better than that, however. With Thursday’s filing, she became one of a handful of accused porn downloaders to go on offense against her attackers. She brought class action fraud, defamation and racketeering claims in federal court in Louisville on behalf of everyone who has been “subjected to the unlawful extortion attempts” of the defendants – Patrick Collins, Inc, Malibu Media, Raw Films, K-Beech and Third Degree Films – since 2007.

Fee request in BofA case is ammo for plaintiffs’ critics

Alison Frankel
Jul 5, 2012 22:53 UTC

Remember the vicious fight between plaintiffs’ lawyers in competing New York and Delaware derivative suits against Bank of America’s board? In April, plaintiffs in the federal case in New York reached a proposed $20 million settlement with the defendants, which prompted their Delaware Chancery Court rivals to scream that the New York lawyers were settling on the cheap after an inadequate investigation. They attempted in both Delaware and New York to block the deal, arguing that the derivative suit should be worth as much as $500 million, but failed to enjoin the settlement. On Thursday, plaintiffs’ lawyers in the New York case filed a motion for preliminary approval of the $20 million deal.

A whopping $13.6 million of the money, they said in the motion, should go to them for fees and expenses. That’s 68 percent of the entire settlement, which will be paid by one of BofA’s carriers of directors and officers insurance. This, folks, is what breeds skepticism about shareholder litigation.

Let me say upfront that it’s not completely outside the realm of possibility that the fee request is justified. Lead plaintiffs’ lawyers at Saxena White and Kahn Swick & Foti made what appears to be a tactical decision to divide the fee issue from the settlement approval process, so they’ll file a formal motion for approval of their request for $13 million in fees and $600,000 in expenses after the settlement itself gets a thumbs-up from U.S. District Judge Kevin Castel. Thursday’s filing said only that the plaintiffs’ lawyers have sunk 24,000 hours into the litigation, representing $10.4 million in time, and that they deserve a 25 percent enhancement of their hourly billings. (Just as an FYI, there are 8,760 hours in a 365-day year, and this case was filed in 2009.) I left phone messages with four partners at Saxena and Kahn Swick, as well as with liaison counsel Curtis Trinko of the Law Offices of Curtis V. Trinko, requesting more information on what they did in those 24,000 hours. None of them called me back.

BofA shareholders: Wachtell ‘excluded’ as Merrill losses mounted

Alison Frankel
Jul 4, 2012 00:09 UTC

Oh, the ironies of megabillion-dollar securities class action litigation!

Last Friday, shareholders filed their response to summary judgment motions by Bank of America and its executives in a class action claiming BofA failed to tell shareholders about Merrill Lynch’s escalating losses and sky-high executive bonuses before BofA bought Merrill in 2008. As you would expect, the shareholders and their lawyers at Bernstein Litowitz Berger & Grossmann, Kaplan Fox & Kilsheimer and Kessler Topaz Meltzer & Check spend considerable time rebutting defense arguments that, as a matter of law, shareholders weren’t injured by BofA’s alleged disclosure lapses. Those arguments, the plaintiffs’ lawyers said, have already been rejected in U.S. District Judge Kevin Castel‘s class certification decision in February.

But deep in the 115-page filing is a more intriguing discussion of the role BofA’s lawyers at Wachtell, Lipton, Rosen & Katz played in the bank’s disclosure decisions. You may recall that former CEO Kenneth Lewis said he is entitled to summary judgment in the case because he relied on his CFO’s assurances that he’d consulted BofA lawyers on disclosure, and they’d said shareholders didn’t need to be told of interim Merrill loss projections that dwarfed initial reports. Lewis’s lawyers at Debevoise & Plimpton implied that the former CEO was under the impression that his CFO, Joe Price, had spoken both to the bank’s then-GC, Timothy Mayopoulos, and to BofA’s deal counsel at Wachtell.

The shareholders’ opposition brief demolishes that implication. “The record … establishes that BoA excluded Wachtell from the disclosure analysis at the critical time in the weeks before the [shareholder] vote,” the brief said. “Wachtell’s senior partners have uniformly testified that they were not informed of Merrill’s key December 3 loss estimate prior to the vote, and that Wachtell was not consulted at all on the issue of disclosure after November 20. Indeed, Wachtell did not learn of the magnitude of Merrill’s losses until December 12, when BoA contacted Wachtell one week after the vote to terminate the transaction because of Merrill’s losses.”

Hot new filing claims internal docs show rating agencies lied on MBS

Alison Frankel
Jul 3, 2012 04:40 UTC

If you’re reasonably literate about the financial crisis, you probably know that the credit rating agencies have slipped through the carnage like a cat walking away from a knocked-over vase. With their opinions on publicly offered mortgage-backed securities protected by the First Amendment, Standard & Poor’s and Moody’s have won dismissals of the vast majority of MBS investor claims against them in state and federal court, despite powerful evidence from congressional investigations that they worked with underwriters to confer investment-grade ratings on securities backed by dreck. With one possible exception, the only surviving cases against rating agencies involve claims by investors in private placements, who have successfully argued that private ratings aren’t protected free speech.

The near-spotless litigation record of the rating agencies means we’ve seen very little internal evidence, in the form of emails between rating execs, emails between the agencies and underwriters and deposition testimony from credit rating agency insiders. The only hard evidence on the agency’s role in the economy’s collapse came from a Senate report.

Until Monday.

In a series of filings in federal court in Manhattan, Abu Dhabi Commercial Bank and its lawyers at Robbins Geller Rudman & Dowd disclosed thousands of pages of internal communications and deposition transcripts to back their claims that S&P and Moody’s are liable for fraud and negligent misrepresentation in connection with their rating of a structured investment vehicle underwritten by Morgan Stanley. Based on a declaration by plaintiffs that accompanied the documents, a huge percentage of the newly disclosed material has never previously been seen by the public – and a good many of the documents deal not just with the Morgan Stanley SIV but more broadly with the rating process inside S&P and Moody’s at a time when the two leading agencies were swamped with mortgage-backed securities to rate.

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