We’ve been asked two questions repeatedly since the Supreme Court granted certiorari in Warner-Lambert v. Kent. We’re answering both of them publicly today.
First, we have no idea why the Supreme Court took the case. No one does. (Well, actually, nine people know, but they wear robes, and they’re not talking.)
There are two possibilities.
On the one hand, Kent created a circuit split. The Sixth Circuit had previously held that the “fraud-on-the-FDA” exception under the Michigan statute was preempted, and the Second Circuit held in Kent that it was not. A difference of opinion in the federal appellate courts is a ground for granting certiorari, and that circuit split might explain the Supreme Court’s decision to take the case.
On the other hand, the Supreme Court might have taken Kent in part because the Court was unhappy with the Second Circuit’s decision and wants to reverse it. That’s a less likely explanation, in our view, but we won’t rule it out.
So our answer to the first question — “Why did the Supreme Court grant cert in Kent?” — resembles our answers to so many other questions posed at this blog: We don’t have a clue.
On to Question #2: If the drug industry’s position prevails in Kent — so federal law displaces certain state law provisions that expand plaintiffs’ possible recoveries — will drug companies move to, or reincorporate in, states that have favorable laws?
We think we know the answer to this one: No.
First, companies probably won’t move their corporate headquarters to take advantage of any change in the law effected by Kent. State legislatures give, and state legislatures taketh away. Since state governments always have the power to change state law, companies won’t (and shouldn’t) uproot themselves to move to a state with this type of (possibly) temporarily favorable product liability law.
Okay, so companies won’t move their headquarters after a favorable decision in Kent. What about taking the alternate step of reincorporating in a state with favorable product liability law? Suppose you’re a drug company headquartered in New Jersey, as so many are, but incorporated in a state other than New Jersey. If industry prevails in Kent, should you reincorporate in New Jersey?
First, many factors affect where a company incorporates itself. Favorable product liability law may be well down the list.
And, second, an industry victory in Kent will affect only some — but not all — of the product liability cases filed against you.
If a California physician prescribes a company’s drug to a California resident, and the Californian ingests the drug, and claims to have been injured by it, in California, California law will govern that lawsuit. That result holds true even if the drug company is headquartered in — or headquartered and incorporated in — New Jersey. The choice of law rules for product liability cases typically apply the law of the state of the injury — here, California — to decide the case.
Thus, if a New Jersey plaintiff sues your drug company, you get the benefit of New Jersey law — no matter where you’re headquartered — and if a California plaintiff sues you, you’re dealing with California law — again, no matter where you’re headquartered. Don’t move or reincorporate even if (knock on wood) business wins a smashing victory in Kent; there’s no way to make New Jersey law apply to all plaintiffs’ claims against you.
A few readers are probably thinking that we’re not being aggressive enough here. Drug companies should not simply reincorporate in New Jersey, but should also press to change the choice-of-law rules, so that New Jersey law would govern all lawsuits filed against New Jersey companies.
Not so fast.
First, that would require a sea change in the law, and it’s tough to create sea changes.
Second, that’s a sea change that would, overall, hurt industry. Choice of law is one of the sharpest arrows in industry’s quiver to defeat motions to certify class actions. If residents of all 50 states bring a single class action lawsuit against a drug company, the company almost always wants to avoid class certification. One compelling way to avoid certification of a putative nationwide class is to explain that California law governs the claims of California plaintiffs, and New York law governs the claims of New York plaintiffs, and Illinois law governs the claims of Illinois plaintiffs, so roping plaintiffs from all 50 states into a single class would create a judicial nightmare.
If we changed the law, so that New Jersey law would govern all claims brought against New Jersey companies, this choice-of-law headache would evaporate. New Jersey law would govern the claims of all class members, the judicial nightmare vanishes, and more classes might be certified.
How about advocating for a smaller change in choice-of-law rules? New Jersey law would not govern in their entirety the claims of all plaintiffs suing a New Jersey company, but would instead govern only requests for punitive damages.
On its face, this seems like a clever idea: New Jersey law bars punitive damages in product liability cases unless a plaintiff proves that the drug company defrauded the FDA; a victory in Kent would probably eliminate the exception and leave in place a rule that plaintiffs simply could not recover punitive damages in products cases.
This approach to choice of law, folks might argue, has some appeal. If a California plaintiff ingests a drug in California, then perhaps California law should govern the compensatory damages piece of the litigation. But, if a New Jersey drug company did something wrong, the corporate misconduct occurred in New Jersey, so New Jersey law should govern the punitive damages piece of the case.
Not so fast! That is not, and should not be, the law.
Moreover, industry shouldn’t want that to be the law. In class action litigation, plaintiffs are always seeking to have some part — any part! — of a lawsuit certified for classwide treatment. A court’s decision to rope together the claims of thousands, or hundreds of thousands, of plaintiffs into a single proceeding will inevitably put huge pressure on the defendant to settle the case. Plaintiffs don’t care which piece of a case is certified for class treatment; just about any certification will do the trick.
If individual legal issues — such as the law governing punitive damages — can be teased out of a case and governed by a single state’s law, that’s a dangerous precedent. Plaintiffs will immediately start isolating other supposedly discrete legal issues, saying that one state’s law can apply to those issues, and seeking class certification of those narrow issues. (That doctrine is often called depecage, and it’s a dangerous one for defendants in our current class action world.) As an industry, we cannot be lending support to that approach. (Indeed, we’ve previously criticized an automobile manufacturer on this very ground.)
In the end:
1. We don’t know why the Supreme Court granted cert in Kent.
2. No matter what the result in that case, drug companies should not be revisiting their choices of corporate headquarters or states of incorporation.
3. Don’t count your chickens before they hatch. The Supreme Court has not yet ruled in Kent, and there’s absolutely no guarantee that we’ll like what we read on the day that decision comes down.
But you can’t blame us for hoping.