With Herrmann in-house and retired (from blogging, at least), only one of us is currently a member of the American Law Institute (“ALI”). That said, Bexis headed down to DC yesterday to attend the ALI’s annual meeting.
With the Aggregate Litigation Project now done, we’re finding the Institute’s meetings less white-knuckle than they used to be – but that’s not to say that they’re boring. Rather, there’s always something interesting going on when the ALI gets together.
Which means there’s something worthwhile to blog about.
This time it was the wrapping up of another ALI project – one that’s been going on for over a decade (since 1997) – the Restatement (Third) of Restitution and Unjust Enrichment. The last part of this project was brought to a final vote yesterday. It passed. True, the ALI grinds slowly, but its final product is finer than anything you’ll find just about anywhere.
One of the things that means is that a lot of the … umm, that’s quite a mouthful so we’ll just call it the “R3RUE” for short … was finished well before Bexis ever joined the ALI. Talk about being late to the party. But not knowing what went on has never stopped Bexis from putting his two cents in before, and it didn’t this time.
That last chunk of the R3RUE that was up for discussion included “defenses to restitution” – leading off with the most basic: §62 entitled “Recipient Not Unjustly Enriched.” This defense was described in the draft:
The defense stated in §62 may appear redundant. If a well-pleaded complaint alleges unjust enrichment, it must be a proper answer (and not an affirmative defense) to plead “no unjust enrichment.” . . .[T]he practical application of the present rule is to a more limited class of cases. These arise when the claimant alleges facts supporting a prima facie claim in unjust enrichment . . . but the recipient is able to show that the resulting enrichment is not unjust, in view of the larger transactional context in which the benefit has been conferred.
R3RUE §62, comment a, Tentative Draft No. 7 (March 10, 2010).
That got us (well, Bexis) interested when he read it on the train down to DC early yesterday morning. There’s a set of recent cases in prescription drug product liability litigation that seem to fit into the pattern described in this part of the R3RUE.
What’s more, none of the illustrations – most of which had to do with payments of one sort or another made under some mistake of law or fact – involved anything similar to these much newer prescription drug cases.
Here’s what was up.
Over the last few years (sufficiently recently that the original 2004 edition of Bexis’ book didn’t even include a section on unjust enrichment) plaintiffs in various prescription drug and medical device litigations have started tossing in “unjust enrichment” claims. This type of claim has been more frequent in economic loss class action litigation, but it’s hardly unique to it. Most of these unjust enrichment claims get dismissed, and one of the recurrent reasons for dismissal seems like it would fit under R3RUE §62.
Specifically, courts have held that – even assuming a drug was “illegally” marketed for an off-label use or “improperly” marketed without adequate warnings – there can’t be unjust enrichment where the drug, when taken by a particular plaintiff, in fact proved effective and didn’t cause any sort of personal injury. That scenario appeared to fit into the “larger transactional context” rubric of §62
That’s because, as the Eighth Circuit recently explained, plaintiffs in this situation actually got what they paid for – regardless of any marketing-related allegations that might otherwise have allowed a plaintiff to plead the elements of a unjust enrichment cause of action:
[A]n unjust-enrichment plaintiff must show receipt of a benefit and unjust retention of the benefit at the expense of another. There is no question that [the defendant] received a benefit when [plaintiff] purchased [the drug]. The issue is whether retention of that benefit was unjust. We find that it was not. The record illustrates not only that [plaintiff’s] cholesterol level fell after he took [the drug], but, as our analysis in the previous section demonstrates, that there is no competent medical evidence showing that [plaintiff] suffered any harm as a result of taking [the drug]. Thus, he received the benefit of his bargain. In light of this, we affirm the district court’s grant of summary judgment on [plaintiff’s] unjust-enrichment claim.
Baycol Products Litigation, 596 F.3d 884, 892 (8th Cir. 2010) (applying California law) (citations omitted) (emphasis added).
The same result was reached in Prohias v. Pfizer, Inc., 490 F. Supp.2d 1228 (S.D. Fla. 2007). Again, the drug that the plaintiffs took proved effective and did not cause them any harm. Bye-bye unjust enrichment claims. As to these individual plaintiffs – they received the benefit of their bargains:
[Plaintiffs] fail to state a claim for unjust enrichment. Both men purchased a cholesterol reducing drug, and both men obtained cholesterol reduction as a result. Therefore, in a general sense, they obtained the benefit of their bargain. Unjust enrichment cannot exist where payment has been made for the benefit conferred. Still, [plaintiffs] claim that they would not have purchased [the drug] but for the misleading advertisements. But their argument is too little too late-they have already received the benefit from taking [the drug], even if they now claim that they do not want that bargain.
Id. at 1236 (emphasis added). As to the third-party payor plaintiff:
[Plaintiff] paid for a cholesterol-reducing drug for its beneficiaries, and its beneficiaries . . . received the benefit of reduced cholesterol. Under these circumstances, it is not inequitable for [defendant] to retain the price of [the drug] paid by the [plaintiff].
Id. (applying Massachusetts, Pennsylvania, and Florida law).
In a similar New Jersey case, the court observed (in the context of a different claim) that the plaintiffs “fail to assert that the Subject Drugs were ineffective, unsafe, or somehow worth less than what Plaintiffs paid for the drugs. Instead, Plaintiffs have merely alleged that the Subject Drugs were not FDA approved for certain conditions.” In re Schering-Plough Corp. Intron/Temodar Consumer Class Action, 2009 WL 2043604, at *13 (D.N.J. July 10, 2009). Those same failures of proof also doomed plaintiff’s unjust enrichment claim. “Plaintiffs have neither pled a cognizable injury nor a direct relation between Plaintiffs’ injury and [defendant’s] alleged misconduct.” Id. at *34.
A New York state court said the same thing. In Baron v. Pfizer, Inc., 840 N.Y.S.2d 445 (N.Y. App. Div. 2007), the court found no cognizable injury where the plaintiff claimed to have taken a drug for an off-label use and demanded “a refund of the purchase price . . . on the ground that she would not have purchased the drug absent defendant’s deceptive practices.” Id. at 448. Plaintiff failed to allege “that use of the product adversely affected [her] health” and the court “note[d] that plaintiff failed even to allege . . . that [the drug] was ineffective to treat her neck pain.” Id. That didn’t make out (among other things) a claim for unjust enrichment:
We similarly conclude that plaintiff’s unjust enrichment claim was properly dismissed. . . . Inasmuch as plaintiff makes only conclusory allegations that defendant’s deceptive acts played a role in her use of [the drug], without alleging that her physician’s decision to prescribe the drug was influenced by defendant or that the drug was ineffective to treat her, she has failed to allege that defendant is in possession of money belonging to plaintiff and her claim was properly dismissed.
Id. at 448-49. Cf. In re Zyprexa Products Liability Litigation, 671 F. Supp.2d 397, 456-58 (E.D.N.Y. 2009) (unjust enrichment could not be established without evidence that off-label use of drug was not medically necessary); In re Viagra Products Liability Litigation, 658 F. Supp.2d 950, 969 (D. Minn. 2009) (given “derth of evidence” that drug was harmful, there was no evidence of anything “unjust”).
Anyway, Bexis was thinking of these cases (the off-label promotion ones, at least) when shortly before lunch, he stepped to the microphone and brought to the ALI reporter’s attention that this a new line of cases might be worth considering as a current illustration of the application of the principle stated in R3RUE §62.
The response was that, because off-label use involved “illegal” behavior, perhaps these cases were more an application of the “Illegality” section stated in R3RUE §32.
Well, that certainly put Bexis in his place. Section 32 wasn’t in the materials for the 2010 meeting, and it may have been adopted before Bexis was even elected to the ALI. Could this line of cases fit in there? Dunno.
Fast forward a day or so. It turns out that R3RUE §32 is on Westlaw. Sure enough, it’s dated 2004 – the year before Bexis became an ALI member. Anyway, §32 deals with contracts that are themselves illegal, like gambling or racially restrictive covenants:
A person who renders performance under an agreement that is illegal or otherwise unenforceable for reasons of public policy may obtain restitution from the recipient in accordance with the following rules:
(1) Restitution will be allowed, whether or not necessary to prevent unjust enrichment, if restitution is required by the policy of the underlying prohibition.
(2) Restitution will also be allowed, as necessary to prevent unjust enrichment, if the allowance of restitution will not defeat or frustrate the policy of the underlying prohibition. There is no unjust enrichment if the claimant receives the counterperformance specified by the parties’ unenforceable agreement.
R3RUE §32, Tentative Draft No. 3 (emphasis added).
Initially it didn’t look like a particularly good fit. Section 32 mostly seems to address the situation where object of the contract being performed is itself illegal (a contract to commit a crime, an illegal contingent fee, a gambling loan, a bribe). These aren’t illegal drugs we’re talking about.
That off-label use is legal was settled in Buckman Co. v. Plaintiffs’ Legal Committee, 531 U.S. 341 (2001). Even assuming illegal promotion of the drug, the use of it is legal. Doctors can prescribe off-label, and patients can use them, perfectly legally. A purchase of a drug prescribed for an off-label use (assuming the sale occurred because of illegal marketing) is itself no more illegal than – say, an employment agreement where the parties originally met through the auspices of a “Help Wanted – Male” want ad that’s a form of illegal sex discrimination.
But we’re nothing if not persistent. Turns out, that there’s some stuff in R3RUE §32 that works. In particular, there’s comment e, concerning “regulatory violations”:
Where the illegality of the underlying transaction consists in a failure to satisfy regulatory requirements, the fact of noncompliance – with rare exceptions – will not be evidence of the moral turpitude or inequitable conduct that forecloses a claim in restitution by the rule of subsection (3). Restitution is accordingly available in regulatory cases, by the rule of this Restatement, unless the court concludes that the allowance of restitution would defeat the policy of the regulation in question.
That certainly fits the off-label situation – but it’s backwards. The restitution plaintiffs in the Baycol/Prohias, etc. line of cases aren’t the drug companies accused of some sort of improper marketing. Rather, they’re the defendants.
So we turn to the language in R3RUE §32(2) that we highlighted above – “There is no unjust enrichment if the claimant receives the counterperformance specified by the parties’ unenforceable agreement.” That’s not exactly the same thing, but it’s getting closer. In the cases discussed above, the ones Bexis mentioned at ALI, at least this part of §32(2) has the transaction running in the right direction.
So we keep looking….
Here it is! Comment f: “Illegality as a Sword.” That’s what these plaintiffs are doing. They’ve gotten – or in the case of a third-party payer, paid for – a drug allegedly because of improper marketing. After the drug has been consumed, they’re trying to void the contract retroactively to either get the drug for free or at a cut rate.
What does the R3RUE have to say about that? Here’s what.
In litigation between the parties to an illegal [which off-label use really isn’t] transaction, the illegality may be asserted defensively . . . or offensively, by the performing party, who repudiates the transaction and seeks to recover the performance or its value. . . . So long as the defendant’s obligation of performance remains executory, restitution is ordinarily available . . . . [W]here the defendant’s obligation has already been performed, it is the allowance of the claim in restitution (rather than its refusal) that will result in forfeiture, penalizing the defendant rather than the claimant. In this setting, moreover, the claimant will rarely be able to demonstrate that the alternative to restitution is the unjust enrichment of the defendant.
If the prohibited transaction has been completed on both sides, restitution will nevertheless be available in cases governed by subsection (1), because the remedy in such cases is independent of unjust enrichment. . . . Where by contrast the claim to reverse a completed exchange depends on a showing of unjust enrichment – a requirement of any claim brought under subsection (2) – restitution will typically be denied. See Illustration 22.
* * * *
22. Tenant sues former Landlord seeking restitution of rent paid for the occupancy of Blackacre under an expired lease, on the ground that Landlord failed to register Blackacre as rental property as required by ordinance. There is no claim that Landlord failed to perform his obligations under the lease. The regulatory illegality might or might not have afforded Tenant a defense to Tenant’s obligation to pay rent, but these facts present a different question. Tenant has no claim to restitution of rent previously paid because Landlord has not been unjustly enriched.
So the Baycol/Prohias line of cases could indeed fit into Restatement §32, comment f. Indeed, for cases that, like Baycol, only involve allegations of marketing with inadequate – not illegal – labels should be barred a fortiori (that’s legal Latin for “even more”).
Putting these recent unjust enrichment decisions into the context of the Restatement first requires the assumption (which we think is simply wrong) that the “illegality” of off-label promotion somehow infects all subsequent purchases of the drug. Given that off-label use is itself legal, we don’t think even that is warranted. But assuming that arguendo, the plaintiffs – whether the actual users or their third party payers – are thus suing over a “completed exchange” as discussed in comment f. That means that, in return for the payments that the plaintiffs are trying to recover, the defendant already provided its prescription drug, which has already been delivered and (presumably) consumed. In that situation, comment f points out, “the claimant will rarely be able to demonstrate that the alternative to restitution is the unjust enrichment of the defendant.”
Moreover, as pointed out in cases such as Talley v. Danek Medical, Inc., 179 F.3d 154 (4th Cir. 1999), off-label use is merely a matter of licensing:
The administrative requirement that a given [product] be approved by the FDA before being marketed – as opposed to a specific substantive requirement that [it] be safe and effective – is only a tool to facilitate administration of the underlying regulatory scheme. Because it lacks any independent substantive content, it does not impose a standard of care.
Id. at 161. Thus the “regulatory violations” rationale of comment e comes into play.
Off-label marketing does not affect the intrinsic safety of the product. All the cases we’ve cited above involve plaintiffs who have not been injured by the drug in any way, and for whom the off-label drugs were, in fact, effective. Given those facts, the new R3RUE puts this sort of claim squarely under §32(2), comment e, and Illustration 22 about the improperly “registered” Blackacre. Where the plaintiffs aren’t hurt, and the drug is effective, the “illegal” marketing can’t be properly invoked as a sword. Rather, it’s just as the courts have stated: The plaintiffs got what they bargained for.
The bottom line – we don’t have any problem with the R3RUE. We’ve figured out that it’s quite possible to fit this new line of cases into it. We’re just afraid that, with the amount of time that it took to craft the final product, the Third Restatement might become obsolete before it’s even published.
The reporter (Prof. Andrew Kull) complained several times yesterday that about so many of his illustrations were really old and based on out-of-date cases and fact patterns. Well, in this one instance, that doesn’t have to be true. There’s a brand new line of cases – generated by a litigation trend that postdates the origin of the R3RUE project – that provides an appropriate illustration. Maybe it belongs under §62 or maybe it belongs under §32, but we think it belongs.