A Recent Blow for Third-Party-Payor-Plaintiffs

Abstract

Commentary and analysis of the Second Circuit’s decision in UFCW Local 1776 and Participating Employers Health and Welfare Fund v. Eli Lilly and Co. (Sept. 10, 2010),  reversing class certification approved by District Judge Jack Weinstein in class litigation based on alleged injuries resulting from the pricing and sale of the pharmaceutical Zyprexa. The litigation involved the ability of a third party payors ― in this instance various unions and their affiliated health care funds ― to recover compensation from the pharmaceutical companies for economic harm as a result of overpricing in the sale of the prescription drug. The chief class claims centered on violation of federal RICO provisions.  

In granting class certification, Judge Weinstein agreed with the plaintiffs’ classwide theories of generalized proof of reliance that formed the basis for the third-party payor RICO claims. Judge Weinstein certified the third party payors’ RICO class predicated on the overpricing theory, but declined to certify an individual payor class or one based on state consumer-protection laws. The court found that the class could use generalized proof to show that Zyprexa was overpriced as a result of Lilly's excessive claims of utility as well as its disavowal of secondary effects. Weinstein held that the plaintiffs could prove reliance on a classwide basis because the alleged fraud was directed through mailings on which doctors relied, causing third party overpayments.

The Second Circuit, invoking its own prior precedent in McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir 2008), again disapproved of the application of classwide theories of  generalized proof of reliance in RICO claims. The court indicated that to recover damages under RICO, a plaintiff must show a substantive RICO violation, injury to the plaintiff's business or property and that such injury was by reason of the substantive RICO violation. The plaintiffs contended that the third parties’ injury was caused by physicians relying on Lilly's misrepresentations and thereby prescribing Zyprexa. The court held that because reliance was a necessary part of the plaintiffs' causation theory, the plaintiffs had to demonstrate that reliance could be shown by generalized proof. The court then concluded that reliance could not be demonstrated by generalized proof and therefore class certification was not appropriate under Fed. R. Civ. P. 23(b)(3).