This guest post was written by Edward J. Sebold and Ashlie E. Case. Mr. Sebold is a partner and Ms. Case is an associate, both resident in the Cleveland office of Jones Day. This post is entirely their work. It of course represents only their views and not the views of their clients or firm.

As if drug and device companies did not have enough to worry about. They are already heavily regulated by the FDA. They face regular scrutiny by Congress. Trial lawyers are always waiting in the wings – looking for the next big thing. And, State Attorneys General have jumped on the bandwagon lately seeking to challenge a variety of company practices. Drug and device companies must now also contend with lawsuits from health plans whose members use drugs and devices and physicians who prescribe these products for their patients. In this environment, the Second Circuit recently recognized limits on the use of state consumer protection statutes as a ground for suing drug and device makers.

Based on common adversaries or common concerns, drug and device makers might well expect to share some affinities with prescribers and health plans. After all, many physicians look unfavorably on trial lawyers as generators of frivolous malpractice claims and drivers of high insurance premiums. One might also expect drug and device companies to share some common interests with health insurance plans because they face close regulatory and litigation scrutiny from many of the same sources. In addition, health plans have access to sophisticated resources for assessing the risks and benefits of prescription drugs and devices.

Nonetheless, lawsuits against drug and device companies by non-consumer, third parties seem to be on the rise. When physicians bring the cases, they often assert: (1) the risk of a drug or device was undisclosed or minimized; (2) this alleged lack of disclosure prevented the doctor from properly assessing the risks, causing the doctor to prescribe or use the product improperly or to prescribe it instead of another purportedly safer product; and (3) these actions by the drug or device company damaged the physician’s practice because the doctor had to perform corrective surgeries, faced malpractice claims from his patients or suffered other harm.

The causes of action asserted by physicians may include breach of contract, fraud, and violation of consumer protection or deceptive trade practice statutes. Barnett v. Mentor Corp., 133 F. Supp. 2d 507 (N.D. Tex. 2001), aff’d 31 Fed. Appx. 156 (5th Cir. Dec. 13, 2001), is an example of a physician generated suit against a device company. For a broader discussion of these physician lawsuits, see Edward J. Sebold and John Q. Lewis, Physician Suits Against Pharmaceutical & Medical Device Manufacturers: Friend Turned Foe?, 7-12 Mealey’s Emerg. Drugs & Devices (2002).

Similar to these physician cases, suits by health insurance plans against drug and device makers frequently focus on a misrepresentation angle. For instance, a plan sponsor may argue that but for a manufacturer’s alleged misstatements about the safety and efficacy of a drug, the drug would not have been included in the sponsor’s prescription benefit plan. Instead, the plan would have arranged for the purchase of a cheaper and/or safer alternative drug. The health plan may seek to recover the difference between the more expensive, problematic product and the cheaper alternative, as well as damages associated with treating plan members prescribed the challenged product.

These suits may assert claims for breach of warranty, unjust enrichment, restitution, RICO, fraud, misrepresentation, and violation of consumer protection or deceptive trade practice statutes. Cases of this sort often arise as part of a larger scale products liability attack on a drug or device, frequently on the heels of a product recall or withdrawal from the market. Drugs and devices that have been targeted in these suits include Rezulin, Bextra and Celebrex, Lipitor, Vioxx, Guidant defibrillators, and Zyprexa. These actions may also follow in the wake of government investigations, such as into off-label promotion of a product. See, e.g., Commonwealth of Pennsylvania v. TAP Pharmaceutical Prods., 885 A.2d 1127 (Comm. Ct. Penn. 2005) (claims arising from average wholesale pricing investigation); Ironworkers Local Union No. 68 v. AstraZeneca Pharmaceuticals, L.P., Case No. 3:07-cv-02313-FLW-TJB (D.N.J. filed May 16, 2007) (asserting claims associated with alleged off-label promotion).

Given the variety of claims asserted, they are subject to a wide range of defenses. We focus here on the use, really the misuse, of consumer protection and deceptive trade practice statutes by third parties. These statutes are frequently in play because many of them are amorphously worded, often do not specifically require direct evidence of reliance on alleged misrepresentations, and tend to provide for exemplary damages and attorneys’ fees.

Many state consumer protection statutes, like the federal Magnuson-Moss Warranty Act, limit claims to products used “for personal, family, or household purposes.” Similarly, many state consumer protection statutes, or the judicial gloss on them, require proof of consumer-oriented deceptive conduct. Some statutes provide a “safe harbor” for government approved advertising or warnings. See, e.g., Bober v. Glaxo Wellcome PLC, 246 F.3d 934, 942-43 (7th Cir. 2001).

Where these laws govern, third parties have a tough time prevailing against drug and device companies on consumer fraud or deceptive trade practice claims. For instance, in Balderston v. Medtronic Sofamor Danek, Inc., 285 F.3d 238 (3d Cir. 2002), the Third Circuit dismissed a physician’s claims against the manufacturers of bone screws because he was not a “purchaser” of the devices for purposes of Pennsylvania’s consumer protection statute. See also In re Rezulin Prods. Liab. Litigation, 392 F. Supp. 2d 597, 614-617 (S.D.N.Y. 2005) (holding that group health plans did not qualify as a “consumer” under the consumer protection or deceptive trade practice statutes of Louisiana or New Jersey).

Courts have construed the consumer protection statutes of other states, however, as potentially providing wiggle room for third parties seeking to use them against drug and device companies. In In re Dow Corning Corporation, No. 95-20512, 2000 Bankr. LEXIS 1579 (Bankr. E.D. Mich. Nov. 3, 2000), the court held that doctors who purchased implants had standing to sue the manufacturer under the Texas Deceptive Trade Practices Act, but doctors who obtained implants through a hospital or professional association did not. In Washington State Physicians Insurance v. Fisons Corporation, 858 P.2d 1054 (Wash. 1993), the Supreme Court of Washington ruled in favor of a physician on his cross-claim against a drug manufacturer under Washington’s consumer protection statute because the law permitted recovery to “[a]ny person who is injured in his or her business or property by a violation” of the statute.

While many of these third party cases have been percolating in the federal district courts, they have received little attention from the United States Courts of Appeals. Earlier this year, the Second Circuit addressed a physician’s effort to use New York’s consumer protection statute, General Business Law § 349, against a medical device maker in Vitolo v. Mentor H/S, Inc., 426 F. Supp. 2d 28 (E.D.N.Y. 2006), aff’d, 213 Fed. Appx. 16 (2d Cir. Jan. 3, 2007). When some of the plaintiff surgeon’s patients experienced deflations of their breast implants — an inherent and unavoidable risk about which every manufacturer warns — he replaced the implants and sued the implant manufacturer, claiming, inter alia, a violation of § 349.

Plaintiff took some comfort in his ability to proceed under § 349 because he had done it once before against another implant manufacturer. Vitolo v. Dow Corning Corp., 166 Misc.2d 717 (N.Y. Sup. Ct. 1995) (finding that physician had standing to proceed under § 349). Also, in the same federal district, Judge Weinstein had allowed third party payor claims to proceed under § 349, noting the state court’s decision in Vitolo as an example of a permitted suit by a physician under consumer protection law. Blue Cross & Blue Shield of N.J. v. Phillip Morris USA, 178 F. Supp.2d 198, 240-41 (E.D.N.Y. 2001).

The district court recognized, however, that applying the consumer protection statute was a poor fit because the gravamen of the complaint was not consumer injury or harm to the public interest; it was harm to the surgeon and his business. The district court distinguished the decisions allowing suits by physicians as dealing only with the issue of standing, and not with the proof required to show harm to the public interest.

The Second Circuit affirmed because the surgeon had not shown that “‘the challenged act or practice was consumer-oriented.’” The question of whether this requirement was met centered on the doctor’s allegation that a Mentor representative told him that the specific model of implant he wanted to purchase had a certain deflation rate. The court reasoned:

The misrepresentation, if it did occur, had no “broader impact on consumers at
large” than it did on Vitolo, and it did not have the potential to “affect
similarly situated consumers” because the alleged misrepresentations regarding
the MLV deflation rate were made to Vitolo in person, and Vitolo failed to
produce evidence that Mentor’s personnel made such representations to other
doctors or to end users.

The Second Circuit rejected a motion for rehearing, holding that the “District Court properly found that Vitolo’s dispute with Mentor was a private contractual dispute, and therefore not within the ambit of § 349.”

Drug and device makers have enough to worry about without physicians and health plans wielding state consumer protection and deceptive trade practice statutes against the companies. As the Vitolo court and others have recognized, these statutes are not intended to redress claims by sophisticated third parties who are not the consumers of prescription drugs or devices.