Today we welcome our first guest post that’s not from somebody affiliated with one or the other of our firms. He’s Adam M. Masin, a senior associate with Reed Smith LLP. Adam is in Reed Smith’s Philadelphia office and – no big surprise – he’s a member of Reed Smith’s Products Liability Group, resident in the Philadelphia office. He tells us he’s a regular reader of our blog. All that follows is solely Adam’s work and insights.

Anytime seven Supreme Court justices agree on anything these days is news. When seven justices agree on the same basic rationale used by the FDA (and those of us who defend drug manufacturers) to determine that many state failure-to-warn claims are preempted, that’s sure something we can use. So no, it’s not every day that tort guys like me look to the intersection of securities litigation and antitrust law to find inspiration in defending against pharmaceutical failure-to-warn claims. But the Supreme Court’s 7-1 (Justice Kennedy recused) decision this term in Credit Suisse Securities (USA) LLC v. Billing, ___ U.S. ___, 127 S.Ct. 2383 (June 18, 2007), gives some hope that the Supreme Court will eventually come down on the side of the FDA (and our clients) in the ongoing preemption debate.

Without getting into the minutia, the Credit Suisse plaintiffs alleged that the defendant investment banks, acting as underwriters, violated the antitrust laws by essentially agreeing to require certain financial pre-conditions for investors who wished to purchase initial public offerings (“IPOs”) for hundreds of technology companies. The investment banks argued that the securities laws impliedly (the law was silent, leaving it to courts to come up with an answer) precluded application of the antitrust laws as to this conduct . Reversing the Second Circuit, the Supreme Court agreed with the investment banks and found the antitrust claims were precluded by the operation of the securities laws.

What does this have to do with preemption in prescription drug cases? The essential question the Court asked was whether two groups of laws purporting to regulate the same activity can be applied simultaneously, or whether the application of one legal framework necessarily precluded the other’s application. The specific question the Court asked was whether there was a “plain repugnancy” between antitrust laws and securities laws. Id. at 2387.

Those questions should sound familiar to readers of this blog. In prescription drug cases, we argue that the FDA’s regulation of prescription drug labeling precludes application of state laws seeking to impact the same activity. Our “plain repugnancy” question is whether a perceived conflict between federal and state law “make[s] it ‘impossible’ for private parties to comply with both state and federal law,” or whether the state law conflicts with the FDA’s regulatory scheme. Geier v. Am. Honda Motor Co., 529 U.S. 861, 873 (2000).

The Credit Suisse Court used four factors to determine that the securities laws precluded application of the antitrust laws: (1) the existence of regulatory authority under the securities law to supervise the activities in question, (2) evidence that the responsible regulatory entities exercise that authority, (3) a resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct, and (4) whether the possible conflict affected practices that lie squarely within an area of financial market activity that the securities law seeks to regulate. Substituting the FDA for the SEC, it is easy to see how this analysis supports preemption of claims alleging inadequate FDA-approved warnings. Credit Suisse, 127 S.Ct. at 2392.

First, the FDA has the regulatory authority under the FDCA to supervise the labeling of prescription drugs. The FDA, like the SEC, “possesses considerable power to forbid, permit, encourage, tolerate, limit, and otherwise regulate virtually every aspect of the practices” at issue. Compare id. at 2392-2393 (listing SEC regulations) with 21 U.S.C. §331 (defining the prohibited acts under the FDCA on the adulteration and misbranding of drugs); 21 U.S.C. §332 (allowing the FDA to bring proceedings to enjoin prohibited acts); 21 U.S.C. §333 (a) and (b) (defining criminal penalties, including fines and imprisonment, for those who engage in prohibited acts, including the sale of misbranded drugs); 21 U.S.C. §335(b) (civil penalties for obstructing FDA’s processes); 21 U.S.C. §372(e)(2) (execute search and arrest warrants); 21 U.S.C. §372(e)(3) (seizure of misbranded drugs).

Second, the FDA does exercise its authority, both in the pre-approval and post-approval process. For example, as the SEC has with respect to IPOs, the FDA has “defined in detail” what drug manufacturers “may and may not do and say during” the pre-approval process (the parallels between an IPO and the approval of a new drug are not few). Credit Suisse, 127 S.Ct. at 2393. Like the SEC, the FDA has the authority to bring actions against those who violate FDA regulations.

But the really good stuff in Credit Suisse was the Court’s answer to the third question – whether the regulatory schemes conflicted. The Court held that the SEC’s expertise was required to draw the often fine line between conduct that is prohibited and conduct that is permitted, or even encouraged. Is a commission illegally excessive? The Court asked “who but the SEC itself” could make the distinction with confidence. See id., at 2394-2395. In our context, is a prescription drug warning appropriate, to weak, or excessive? Who but the FDA itself is best to judge?

The Credit Suisse Court certainly didn’t think that nonexpert judges or juries should be judging these kinds of issues “in light of the nuanced nature of the evidentiary evaluations necessary to separate the permissible from the impermissible.” Id. at 2395. The Court was concerned about the “unusually high risk that different courts will evaluate similar fact circumstances differently.” Id. The FDA has recognized the same problem in failure-to-warn cases – which are far more numerous than antitrust litigations and present far more opportunities for inconsistent results — noting the regulatory chaos that would result if the ultimate sufficiency of prescription drug labeling were left to hundreds of lay juries or 50 state governments.
In Credit Suisse, the Court summed up the conflict this way:

Now consider these factors together – the fine securities-related lines separating the permissible from the impermissible; the need for securities-related expertise []; the overlapping evidence from which reasonable but contradictory inferences may be drawn; and the risk of inconsistent court results.

Credit Suisse, 127 S.Ct. at 2395. Change a word or two, and it sounds a lot like one of the FDA’s amicus briefs.

As far as the consequences of these conflicts are concerned, in the securities context the Court was concerned that underwriters would be discouraged not only from engaging in improper activity, but also from acting in a way the securities laws encourage under the threat of “antitrust mistakes” which could lead to treble damages. Id. at 2396. Just as the Court recognized that antitrust lawsuits could alter underwriter conduct in “undesirable ways,” so has the FDA recognized that manufacturers might end up diluting good warnings in favor of over-warning in an effort to avoid lawsuits (and punitive damages). Id. If the SEC is the best judge to balance these considerations in its area of expertise, so should the FDA be the best judge to balance identical considerations within its purview. Right?

If there is a caveat, it comes at the end of the Credit Suisse decision where the Court considered the enforcement need for antitrust actions. The Court noted that private litigants damaged by unlawful practices had the ability to bring suit under the securities laws (that the SEC also disapproved of the conduct at issue did not prevent the Court from finding a conflict with the antitrust laws). Id. The FDCA does not provide a similar avenue to those who use prescription drugs, which would allow plaintiffs to argue for a more open door to state enforcement in prescription drug cases.

But Credit Suisse goes on to slam that door shut. It emphasizes the role of the SEC in enforcing the rules and taking into account considerations that might harm certain investors. Id. The FDA certainly plays a similar role in protecting consumers. So when preemption makes it to the Supreme Court, the decision might just turn on how well the justices believe the FDA is doing it job.

Justice Breyer’s majority opinion in Credit Suisse didnt discuss of the level of deference due to the SEC, which unsurprisingly believed that application of the antitrust laws “would threaten to disrupt the full range of the Commission’s ability to exercise its regulatory authority.” Id. But the Court’s 7-1 holding was squarely on the SEC’s side of the argument, and the rationale endorsed by the seven-member majority can be easily transplanted into a FDA-preemption analysis – making Credit Suisse a difficult case to ignore as the preemption battle moves forward.