Last week the New Jersey Supreme Court, in a unanimous decision (6-0) ordered a nationwide third-party payer class action decertified. See International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck & Co., 2007 WL 2493917 (N.J. Sep. 6, 2007). There have already been a number of blog posts discussing this case, by, among others, PointOfLaw, the ubiquitous LawProfessors, Legalnewsline, Pharmalot, blawgletter, and Jurist.
Sure, we’re a little slow this time. That’s because it’s a Vioxx case. Regular readers (clickers?) know that ordinarily when something happens in Vioxx you get pure, unadulterated Herrmann – and we know how much all of you out there like that. That’s due to Bexis’ involvement in that litigation. But this time Bexis has gotten special dispensation (stop heading for the hills, it’s not that bad). That’s why we’re late. That dispensation took time. It also comes with a price: there won’t be any mention of Vioxx, or the specific facts the Operating Engineers case for the rest of this post. On this blog that’s the functional equivalent of “forever.”
Well, here goes.
Anybody who currently defends FDA-regulated manufacturers in product liability actions knows two things: (1) over the past few years, plaintiffs have “discovered” consumer fraud statutes – raising them from the “miscellaneous” status they’d previously held to something that’s routinely pleaded and pursued; and (2) New Jersey has become a relative hotbed of consumer protection litigation because the New Jersey statute is one of the most liberal (read: easy for plaintiffs to win under) such statutes in the country.
The Operating Engineers case was one of the more recent and more disturbing of the cases arising from this hotbed – for several reasons.
First, the case involved large claims – those allegedly possessed by so-called third party payers: “health plans” “that. . .make payments to pharmaceutical companies for prescription medications for those for whom its benefit plans afford coverage.” 2007 WL 2493917, at *1. That’s what they are for us lawyers. For the rest of you they’re health insurers – you know, the folks you came to love so much in Sicko.
Second, the lower New Jersey courts had allowed consumer fraud claims of this nature to be pursued as a class action, dramatically raising the stakes, because common issues supposedly “predominated.” The intermediate New Jersey appellate court (“Appellate Division”) held that the defendant’s claimed conduct in marketing its drug was a class-wide common issue, 2007 WL 2493917, at *6; and that causation was also a common issue, because it “may be proven, on a class-wide basis, by reliance on expert analysis alone.” Id. at *10.
Third, and perhaps most dramatically, the lower court approved extension of class certification to every third-party payer in the country. This could occur, the Appellate Division held, because the defendant was a New Jersey corporation and New Jersey’s “strong interest in deterrence” of consumer fraud by New Jersey businesses outweighed all other states’ interests. International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck & Co., 894 A.2d 1136, 1151 (N.J. Super. A.D. 2006).
We’d touched on the Operating Engineers case once before – offering our opinion that “the handwriting was on the wall” when the Rowe v. Hoffman-La Roche, Inc., 917 A.2d 767 (N.J. 2007), reversed another case (relied upon by the Appellate Division), finding it improper to apply New Jersey product liability (not consumer fraud) standards nationwide.
While we correctly predicted the result, we were dead wrong about the rationale the supreme court chose to get there. In Operating Engineers, the Supreme Court did not even reach what it characterized as the defendant’s “strong arguments” against nationwide, extraterritorial application. 2007 WL 2493917, at *8 n.3.
Never has being wrong felt so right (no, we’re not counting that – get your mind out of the gutter).
Why? Well a ruling (like the one we envisioned) rejecting the extraterritorial application of consumer fraud statutes would probably have triggered the same result that followed the rulings in In re St. Jude Medical, Inc., 425 F.3d 1116, 1119-21 (8th Cir. 2005), and Castano v. American Tobacco Co., 84 F.3d 734, 743-44 (5th Cir. 1996) – that is, continued attempts to certify identical classes on narrower bases after broad class certifications were reversed. In other words, a pro-defense ruling on extraterritoriality in Operating Engineers would have left intact the rest of the Appellate Division’s decision that consumer fraud claims of this sort of claim were proper candidates for class certification. Thus, pharmaceutical (and other) manufacturers would have faced a horde of New Jersey-only class actions brought on behalf of third party payers.
Not any more.
Operating Engineers places imposing barriers in the way of class certification of consumer fraud claims involving mass marketed products – especially claims brought by large institutional plaintiffs such as third-party payers.
The court first reiterated that “predominance” could not focus narrowly on the conduct of defendants marketing products. Such conduct cannot be a common issue where (as is almost always the case) the various members of the class reacted to that small portion of the marketing that they are exposed to in different ways. Even though the New Jersey act does not require classic “reliance,” it still demands proof of an “ascertainable loss” that is causally related to the allegedly illegal conduct. 2007 WL 2493917, at *9-10. Disparate reactions to mass marketing defeat the commonality of this element of consumer fraud:
[A]vailable information makes it plain that [the class includes] a diverse group of entities. More important to our analysis, however, plaintiff does not suggest that each of these proposed class members, receiving the same information from defendant, reacted in a uniform or even similar manner.
2007 WL 2493917, at *9 (emphasis added). Thus, the “the commonality of defendant’s behavior” was “but a small piece of the required proofs.” Id. That’s a critical ruling because of its breadth. It’s very rare for any large group – whether of individual consumers or large institutions – to react “uniformly” or “even similarly” to anything, let alone something so varied and constantly changing as drug marketing.
As we’ve discussed, drugs are almost always governed by the learned intermediary rule. A lot of doctors discount drug advertising entirely. Even those who don’t are exposed to a wide variety of marketing efforts, some of which they respond to more than others. One reason for plaintiffs counsel’s recent affinity for third-party payers as plaintiffs is to avoid the prescribing physician problem that has led to decision after decision rejecting certification of classes of prescription drug consumers.
Anyway, the upshot of Operating Engineers is judicial recognition, by an influential state supreme court, that diversity of decision-making extends to large institutional payers as well. See 2007 WL 2493917, at *2-3, 9 (describing intricacies of third-party payer formulary procedures).
That’s good, but it gets better. As mentioned above, the plaintiffs tried to get around the factual intricacies of “ascertainable loss” by claiming that experts could compute statistically some sort of “effect on the price” of a product by virtue of artificially increased demand that they claimed was generated by the improper marketing. 2007 WL 2493917, at *10. The court said “no way” – that this type of attempted proof is a form of “fraud on the market,” which inapplicable to the New Jersey consumer fraud statute (and, indeed, to any cause of action based upon New Jersey law):
We have rejected the fraud on the market theory as being inappropriate in any context other than federal securities fraud litigation. Therefore, to the extent that plaintiff seeks to prove only that the price charged for [the product] was higher than it should have been as a result of defendant’s fraudulent marketing campaign, and seeks thereby to be relieved of the usual requirements that plaintiff prove an ascertainable loss, the theory must fail.
. . .To the extent that that plaintiff intends to rely on a single expert to establish a price effect in place of a demonstration of an ascertainable loss or in place of proof of a causal nexus between defendant’s acts and the claimed damages, however, plaintiff’s proofs would fail. That proof theory would indeed be the equivalent of fraud on the market, a theory we have not extended to CFA claims.
Id. (emphasis added). This sort of “price inflation” theory, as advocated in Operating Engineers, is hardly limited to prescription medical products, as we’ve previously discussed. Thus, the Operating Engineers decision that “you can’t do this” will inure to the benefit of product manufacturers of all sorts defending against consumer fraud claims – much better than a mere extraterritoriality decision not addressing the merits of the claims would have been.
And this holding is ironclad. It commands a 6-0 majority of what is ordinarily a rather liberal court (we believe Operating Engineers is the first time the New Jersey Supreme Court has ever reversed class certification in any context) in class action, product liability, and consumer fraud cases.
These two rulings – that consumer reactions to mass marketing are inherently individualized and that “ascertainable loss” cannot be proved statistically – would be plenty to cheer about from for any judicial opinion, but there’s still more. The court went on to address the role of institutional plaintiffs in determining the “superiority” of the class action device.
As we discussed above, one tactical reason for naming third-party payers as class action plaintiffs is that it avoids the individualized nature of the learned intermediary rule, and most courts do apply the learned intermediary rule to consumer protection statutes.
But there’s more than one reason plaintiffs’ counsel in class action cases favor the institutional defendant. The claims are larger. Each third-party payer is like a mini-class action in and of itself, since its actions involve reimbursement of prescription costs for a multitude of individual beneficiaries. Thus, the size of the number next to the dollar sign in the ad damnum clause of the complaint (that lawyer-speak for the amount of money at stake) goes up much, much faster when every member of the class potentially has a large claim.
The New Jersey Supreme Court in Operating Engineers also held that – in and of itself – the presence of institutional plaintiffs with large individual claims makes class certification undesirable. The “traditional” class action was intended to help the “little guy,” not big-business plaintiffs fully capable of litigating their own claims if they believe them to be meritorious:
[W]e cannot escape the vast differences between that appropriate use of the class action device and the present inappropriate one. . . .[P]laintiff and, by extension, all of the members of the class, allege that they have been damaged in large sums.
. . .[P]laintiff and the other third-party payors are well-organized institutional entities with considerable resources. . . . [W]e see no disparity in bargaining power and no likelihood that the claims are individually so small that they will not be pursued. In short, we find no ground on which to conclude that this proposed nationwide class meets the test for superiority that we have traditionally required.
2007 WL 2493917, at *12 (emphasis added). In New Jersey anyway, the subterfuge of using third-party payers as plaintiffs in class actions – no matter what the product – is thus out the window.
Before anybody out there accuses us of crying crocodile tears for the “little guy,” let us be clear, we don’t think that consumer fraud claims are ever a good idea with respect to products that are marketed through thoroughly federally-regulated means, as with prescription medical products, no matter who the plaintiff might be. To us, preemption is the proper response to any claim that advertising that the FDA permits constitutes “consumer fraud.”
As far as we’re concerned, the evils that consumer protection statutes were designed to defeat are those of the odometer-turning used car salesman, the usurious door-to-door encyclopedia salesman, the high-pressure telemarketer bilking little old ladies out of their savings, the bait and switch advertiser, and the like. And we’ve noted, many states have explicit carve outs for federally sanctioned activity in their consumer protection statutes. Only a few, like New Jersey, do not. But we don’t view the lack of such a carve out as dispositive, since we’ve yet to see anyone show us any legislative history in any state that legislators contemplated suits against FDA-regulated marketing when these statutes were passed.
Still, until our preemption views prevail, we’ll take advantage of whatever defenses and arguments we have to defeat artificially manufactured class actions of the sort exemplified by the Operating Engineers case. The New Jersey Supreme Court only added to our armamentarium. Class certification of consumer fraud claims in New Jersey just got a whole lot harder.
Finally, we’re compelled to turn to the dog that didn’t bark in Operating Engineers – extraterritoriality. As the court noted, just because it didn’t reach that issue doesn’t mean the arguments against the extraterritorial application of state consumer fraud statutes aren’t “strong.” Certification of nationwide classes is “rare” and application of one state’s to the entire country is “even more rare.” 2007 WL 2493917, at *8 n.3.
Even before the Rowe case, most New Jersey precedent was contrary to extraterritorial application of the state’s consumer fraud statute. “New Jersey has a long history of attenuating the incorporation contact when conducting choice of law analysis.” NL Industries, Inc. v. Commercial Union Insurance Co., 154 F.3d 155, 159 (3d Cir. 1998). Mere New Jersey incorporation was insufficient in Heavner v. Uniroyal, Inc., 305 A.2d 412 (N.J. 1973), to control the choice of law issue. The supreme court held that the plaintiff was not entitled to apply substantive New Jersey law where accident happened elsewhere:
[W]e do not believe that New Jersey has any sufficient interest in this action to call for the application of its substantive law. . . . Our only possible interest is that [defendant] a national company, is incorporated here and that is not enough. All other interests are North Carolina’s. Quite apart from choice-of-law considerations, it seems obvious that trial of the case would be much more convenient in North Carolina than in New Jersey.
Id. at 414 n.3.; accord Fink v. Ricoh Corp., 839 A.2d 942, 983 (N.J. Super. L.D 2003); Heindel v. Pfizer, Inc., 381 F. Supp.2d 364, 376-77 (D.N.J. 2004); Lewis Tree Service, Inc. v. Lucent Technologies, Inc., 211 F.R.D. 228, 233 (S.D.N.Y. Nov. 20, 2002); Chin v. Chrysler Corp., 182 F.R.D. 448, 457 (D.N.J. 1998); Campofiore v. Wyeth, 2004 WL 3105962, at *4 (Conn. Super. Dec. 7, 2004); cf. Gantes v. Kason Corp., 679 A.2d 106, 113 (N.J. 1996) (applying New Jersey “procedural” statute of limitations on basis of corporate domicile; distinguishing that from “substantive law”). Conversely, New Jersey courts have refused to apply the law of other states because corporate defendants are incorporated somewhere other than in New Jersey. In re Ford Motor Co. Ignition Switch Products Liability Litigation, 174 F.R.D. 332, 348 (D.N.J. 1997).
As to extraterritoriality generally, the court in Chin v. Chrysler Corp., 182 F.R.D. 448 (D.N.J. 1998), held that the New Jersey consumer protection act could not be exported to out-of-state transactions. “[A]pplication of New Jersey’s choice-of-law rules to the present action, clearly leads to the necessity of applying the law of 50 states if a nationwide class is certified.” Id. at 457. The court could find no basis for applying the act extraterritorially:
Each Plaintiff’s home state has an interest in protecting its consumers from in-state injuries caused by foreign corporations and in delineating the scope of recovery for its citizens under its own laws. These interests arise by virtue of each state being the place where Plaintiffs reside, or the place where Plaintiffs bought and used their allegedly defective vehicles or the place where Plaintiffs’ alleged damages occurred.
Plaintiffs argue that the Court can apply New Jersey law in the present action. While it might be desirable for the sake of efficiency to settle upon one state, such as New Jersey, and apply its law in lieu of the other 49 jurisdictions, due process requires individual consideration of the choice of law issues.
Id. at 457.
A lot of other jurisdictions apply same rationale to reject extraterritorial application of consumer protection and similar statutes. Although the rationales vary, numerous courts have prohibited out-of-state plaintiffs from applying the state consumer fraud statute of another state to economic transactions that did not take place in the state or involve that state’s residents.
- Arkansas: Chalmers v. Toyota Motor Sales, USA, Inc., 935 S.W.2d 258, 264 (Ark. 1996).
- California: J.P. Morgan & Co., Inc. v. Superior Court, 6 Cal. Rptr.3d 214, 234-35 (App. 2003); Norwest Mortgage, Inc. v. Superior Court, 85 Cal. Rptr.2d 18, 23-24 (App. 1999); Arabian v. Sony Electronics, Inc., 2007 WL 627977, at *9-10 (S.D. Cal. Feb. 22, 2007); Speyer v. Avis Rent a Car System, Inc., 415 F. Supp.2d 1090, 1099 (S.D. Cal. 2005).
- Delaware: Marshall v. Priceline.com, Inc., 2006 WL 3175318, at *2 (Del. Super. Oct. 31, 2006) (“there was no intent of the legislature to create any extraterritorial effects”).
- Florida: Oce Printing Systems USA, Inc. v. Mailers Data Services, Inc., 760 So.2d 1037, 1041 (Fla. App. 2000); Montgomery v. New Piper Aircraft, 209 F.R.D. 221, 229 (S.D. Fla. 2002).
- Indiana: In re Bridgestone/Firestone, Inc., 288 F.3d 1012, 1018 (7th Cir. 2002) (“sales of products in [a state] must conform to [that state’s] consumer-protection laws”).
- Illinois: Avery v. State Farm Mutual Automobile Insurance Co., 835 N.E.2d 801, 853 (Ill. 2005) (“the General Assembly did not intend the Consumer Fraud Act to apply to fraudulent transactions which take place outside Illinois”).
- Maryland: Consumer Protection v. Outdoor World, 603 A.2d 1376, 1383 (Md. App. 1992).
- Minnesota: In re St. Jude Medical, Inc., 425 F.3d 1116, 1121 (8th Cir. 2005); Mooney v. Allianz Life Insurance Co. of North America, 2007 WL 128841, at *10 (D. Minn. Jan. 12, 2007).
- Missouri: Chong v. Parker, 361 F.3d 455, 459-60 (8th Cir. 2004).
- New York: Goshen v. Mutual Life Insurance Co., 774 N.E.2d 1190, 1195 (N.Y. 2002) (“the transaction in which the consumer is deceived must occur in New York”).
- Pennsylvania: In re Relafen Antitrust Litigation, 221 F.R.D. 260, 276-77 (D. Mass. 2004); Lewis v. Bayer AG, 2004 WL 1146692, at *12 (Pa. C.P. Philadelphia Co. Nov. 18, 2004) (“consumer protection acts are designed to protect the residents of the states in which a deceptive act occurs”).
- South Carolina: Robertson v. Bumper Man Franchising Co., 612 S.E.2d 451, 452 (S.C. 2005) (“[i]t is unnecessary to conduct any in-depth analysis in order to conclude that the answer to this question [extraterritoriality] is “no”).
- Texas: Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675, 698 (Tex. 2002); Tracker Marine, L.P. v. Ogle, 108 S.W.3d 349, 358 (Tex. App. 2003) (“It is hard to see how the interests of each state could be met any better than by allowing each to apply its own laws”); Destec Energy, Inc. v. Southern California Gas Co., 5 F. Supp. 2d 433, 464 (S.D. Tex. 1997), aff’d, 172 F.3d 866 (5th Cir. 1999).
- Wisconsin: K-S Pharmacies, Inc. v. American Home Products Corp., 962 F.2d 728, 730 (7th Cir. 1992) (applying Wisconsin law); Emergency One, Inc. v. Waterous Co., 23 F. Supp.2d 959, 971 (E.D. Wis. 1998).
Extraterritoriality also raises constitutional considerations, arising under the Due Process clause. As we’ve discussed, these concerns most commonly arise in the context of punitive damages, where the Supreme Court has held that one state cannot award punitive damages for allegedly injurious conduct in other states:
A State cannot punish a defendant for conduct that may have been lawful where it occurred. . ., [n]or, as a general rule, does a State have a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State’s jurisdiction. . . . A basic principle of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction.
State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 421-22 (2003). Campbell analogizes punitive damages to awards of multiple damages. Id. at 425 (mentioning state law that “provid[es] for sanctions of double, treble, or quadruple damages to deter and punish”). Trebling under the New Jersey statute is mandatory, Cox v. Sears Roebuck & Co., 647 A.2d 454, 465 (N.J. 1994), so the act can properly be viewed as punitive in nature under Campbell. See Wanetick v. Gateway Mitsubishi, 750 A.2d 79, 85 (N.J. 2000) (declaring treble damages under the statute to be “punitive in nature”).
Our discussion of extraterritoriality is to say that, while we’re pleased (that doesn’t begin to describe it) with the outcome in Operating Engineers, that doesn’t mean that we think any less of the extraterritorial argument that the New Jersey Supreme Court declined to reach. All it means is that we’ll have to root for the next appeal to present that issue. Given the frequency with which out-of-state plaintiffs try to assert the New Jersey statute, we doubt we’ll have to wait all that long. Given Operating Engineers, however, it’s considerably less likely that this next case (whatever it might concern) will be a class action – and we’re delighted with that.