Law

This post comes only from the Cozen O’Connor side of the blog.

For years, many courts have treated RICO as a sprawling monster, awkwardly extending its civil reach into areas and transactions for which RICO was seemingly never intended, including healthcare litigation.  For over fifteen years, the Third Circuit resisted this trend.  Until now.  With its decision in In re Avandia Marketing, Sales Practices & Prod. Liab. Litig., 2015 U.S. App. LEXIS 18633 (3d Cir. Oct. 26, 2015), the Third Circuit scuttled its previous good work and stretched RICO’s arms all the way out to reach consumer disputes with pharmaceutical manufacturers.

Fifteen years ago, the Third Circuit looked at things very differently.  In Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir. 2000), it upheld the dismissal of a class action complaint in which HMO members tried to turn allegations that Aetna’s HMO didn’t provide the promised quality of healthcare into RICO claims seeking financial damages.  Plaintiffs claimed that Aetna restricted doctors’ ability to provide quality care, in fact offering them financial incentives to withhold quality service, even though Aetna had represented to plaintiff that it would provide high quality care from HMO doctors incentivized to do so.  Id. at 475.  Plaintiffs made clear, however, that they were not claiming injuries suffered through a denial of benefits or subpar treatment.  Id.  They were alleging only financial losses—that is, the difference in worth between the plan that they got and the one they were promised.  But this created a disconnect.  By failing to allege denial of or substandard care, plaintiffs had alleged no concrete financial injury.  They got what they paid for.  Id. at 483, 490.  RICO’s requirement of a concrete financial injury is intended to prevent plaintiffs from converting every ordinary tort claim into a RICO claim for the purpose of trying to win treble damages.  The Third Circuit focused on that requirement and upheld dismissal of plaintiffs’ RICO claim.  

Fifteen years later, In Re Avandia presented the Third Circuit with essentially the same claim, even though the healthcare industry participants and product were somewhat different.  The plaintiffs were the end-user consumers and third party payors, not just the consumers.  The defendant was a pharmaceutical company, not an HMO operator.  And the product was a drug, Avandia, not the entirety of the HMO’s medical services.  But the same principles were at play.  Plaintiffs brought a RICO claim based in fraud, alleging that the manufacturer misrepresented Avandia’s safety and effectiveness.  In other words, they alleged that the manufacturer misrepresented what consumers were getting.  Sounds familiar.  Plaintiffs alleged that, because of these misrepresentations, they paid more for Avandia than it was worth.  Still sounds familiar.  Plaintiff sought RICO financial damages equal to the difference in worth between the drug that they got and the one that they were promised.  Very familiar.  And plaintiffs did not allege that they received unsafe or ineffective drugs.  On the nose.  Given this unmistakable similarity, defendants moved to dismiss the RICO claim for failure to allege a concrete injury, relying—of course—on Maio.  

But the Third Circuit changed course.  The Third Circuit announced that the Avandia plaintiffs did not need to show, or allege, that the drug that they purchased failed to perform safely and effectively.  The Third Circuit reasoned that plaintiffs could instead rely solely on the effect that the alleged misrepresentations had on the price of Avandia:

The TPPs' damages do not depend on the effectiveness of the Avandia that they purchased, but rather on the inflationary effect that GSK's allegedly fraudulent behavior had on the price of Avandia. By contrast, the damages suffered by the plaintiffs in Maio were entirely dependent on the quality of the health care they received. Because the plaintiffs in that case did not allege that they had received inadequate care, their "theory of present economic loss require[d] a significant degree of factual speculation," and was thus insufficient to establish standing.

Id. at *17.

We understand the words that the court wrote here.  We just don’t get the distinction.  Noting that the Maio plaintiffs’ RICO damages depended entirely on the quality of the healthcare that they ultimate received doesn’t highlight a difference.  It highlights a similarity.  The Avandia plaintiffs’ RICO damages also depended entirely on the quality—effectiveness and safety—of the Avandia that they received.  In each case, the plaintiffs claimed that the alleged misrepresentations inflated the price of the product or service that they received.  Yet, in each case, if they received what was represented to them, they were not damaged.  And so, just as the Maio plaintiffs had to show that they got lesser care than promised to show a concrete injury, the Avandia plaintiffs should have been required to show that the Avandia they received performed less safely and effectively than promised.  If not, they got what they paid for and had no claim.  We are simply unable to see a meaningful difference between the claims.

The Third Circuit’s other justifications don’t ring true either.  The Third Circuit mentioned that Maio involved a contract to purchase healthcare benefits.  We’re not sure that that matters when considering the viability of plaintiffs’ misrepresentation claim and the injury received.  But, regardless, it seems to us that a purchase of a drug for a price also involves a contract of some sort.  Next, the Court stated the decision in In re Warfarin Sodium Antitrust Litig., 391 F.3d 516 (3d Cir. 2004), was a stronger precedent than Maio.  We can’t see that at all.  While the Warfarin decision addressed a class action, it did not address RICO.  It was an antitrust case.  And the decision addressed only the approval of a class action settlement.  It did not address a motion to dismiss or even a motion for summary judgment.  There was no indication that the issues involved in Maio or Avandia were even briefed in any detail to the Court.  In fact, the Warfarin Court doesn’t even cite Maio, which had been decided just three years earlier.

This requirement of a concrete financial injury isn’t a minor, metaphysical requirement.  It prevents the expansion of civil RICO liability into areas in which it doesn’t belong, particularly given when class actions are involved.  In the Avandia case, the plaintiffs intentionally avoided alleging that their drug ultimately performed less safely and effectively than promised because they were trying to manufacture a class action with treble damages under RICO.  To do that, they needed sameness.  So they tried to wipe away the differences, which can reduce the size of the class or eliminate the possibility of class treatment altogether.  In particular, given that many Avandia users got a drug that worked safely, while only a small minority did not, plaintiffs’ counsel tried to wipe that difference away.  So they tried to draft a claim in which the ultimate performance of the drug didn’t matter, only market and price theory mattered.  But that’s a false world.  In the real world, users of the drug have vastly different experiences.  Many of them—in fact most of them—experienced a drug that worked precisely as represented.  If that fact was relevant—and of course it is—those users could not be part of the class, and the potential recovery of the class action drops precipitously.  And, so, plaintiffs’ counsel (successfully, so far) took the actual performance of the drug out of their story.

But once they did that, they removed the concrete financial injury element of their RICO claim.  That’s what Maio held.  And that, for fifteen years, had prevented the unwarranted expansion of RICO into ordinary healthcare claims like those at issue in Maio and Avandia.  Now that the Avandia court has done an about-face, however, we can expect more of those RICO claims to find their way into the dockets of district courts in the Third Circuit.  

As the year draws to an end, we suspect that we'll have more to say about this decision.