We wrote yesterday about how common sense had gone missing from the Southern District of Illinois. But common sense is like the Dow Jones index – some days it is down 1,000 points in a few minutes, other days it is up 400 points. Today we’re bullish. Specifically, we are happy to report about a fine example of a federal court applying common sense, in Hale v. Stryker Orthopaedics, 2009 U.S. Dist. LEXIS 126886 (D.N.J. Feb. 9, 2009). If you ever wondered why third party payers and not patients bring RICO claims against drug and device companies for behavior that supposedly makes products cost too much, Hale provides a nice explanation. Hale also applies a dose of common sense to the vexing question of which state’s consumer protection laws apply.

Hale was a typical example of some plaintiffs looking for a piggyback ride onto a federal investigation. As a result of a federal criminal investigation into joint manufacturers allegedly giving improper kickbacks to surgeons, Smith & Nephew entered into a Deferred Prosecution Agreement and consented to federal monitoring, and both Smith & Nephew and Stryker entered into five-year Corporate Integrity Agreements. Id. at *3-4. Using their Smith & Nephew/Stryker knee implants as their litigation hook – knee implants that apparently worked fine – plaintiffs tried to kick those companies when they were down. They brought RICO, unjust enrichment, and consumer fraud claims, alleging that defendants’ kickback scheme artificially inflated the coinsurance payments for their knee replacement surgeries. Plaintiffs claimed that the kickbacks increased the price of knee implants to hospitals and insurers, and the insurers passed those costs to plaintiffs in elevated coinsurance payments. Id. at *4-5.

That’s right – they brought a claim under the Racketeer Influenced and Corrupt Organizations Act over copays.

But it didn’t last long, we’re pleased to report.

Defendants moved to dismiss the RICO claims because plaintiffs were not direct purchasers of the knee implants – they paid only a coinsurance payment to their insurers – and therefore lacked standing to assert RICO claims. This direct purchaser argument comes from an antitrust rule recognized by the Supreme Court in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that indirect purchasers do not have standing to bring antitrust claims, a rule the Third Circuit extended to RICO actions in McCarthy v. Recordex Serv. Inc., 80 F.3d 842 (3d Cir. 1996). The rationale of McCarthy, as explained by Hale, is that defendants would be exposed to multiple liability from both direct and indirect purchasers if indirect purchasers had standing to sue for overcharges. 2009 U.S. Dist. LEXIS 126886 at *10. In addition, apportioning the amount of the overcharges to the different purchasers in the chain of distribution would be difficult to impossible. Id.

The Hale plaintiffs argued that they were directly injured because they made inflated coinsurance payments. The court responded with the judicial equivalent of ”you’ve got to be kidding.” The key standing question, as the court held, is whether plaintiffs were direct purchasers, not whether they could gin up some cockamamie injury that they supposedly could trace back to the seller:

Between Plaintiffs and Defendants in the chain of distribution stand several actors, including the hospitals performing the joint surgeries and Plaintiffs’ insurers. This chain of distribution squarely presents the multiple liability and damage apportionment risks discussed in McCarthy. Thus, Plaintiffs’ co-payment alone does not allow them to stand in the shoes of a direct purchaser for standing purposes.

Id. at *11. And that is why third party payers rather than patients are behind the recent wave of RICO claims against drug and device companies: the patients do not have standing because they are not direct purchasers. In addition to dismissing the RICO claim for lack of standing, the court found that the plaintiffs did not adequately plead a substantive RICO claim because they failed to satisfy Rule 9(b)’s requirement to plead fraud with particularity. Id. at *14-18. That’s one problem with trying to piggyback onto the results of a federal investigation: you may not have enough information about what happened to satisfy pleading standards. No one made any fraudulent statements to the Hale plaintiffs. All they were able to do is make general, conclusory allegations about the supposed misrepresentations made by the defendants, but that didn’t cut it, the court said. Id. at *16-17.The Hale court then considered plaintiffs’ claim of violation of state consumer protection laws. The three plaintiffs claimed violation of the consumer protection laws of 37 states because they were trying to bring a class action. Not so fast, the court said. Until the class is certified, the case is only between the named plaintiffs and the defendants. Id. at *19. Unfortunately for the plaintiffs, they resided in Iowa. No, that is not a dig at the Food Capital of the World, the home of the amazing University of Northern Iowa Panthers; it’s merely a comment on their legal claims. In Iowa, unlike New Jersey, there is no private right of action under the state’s Consumer Fraud Act. Maybe Iowa really is like Heaven, as Shoeless Joe and Ray Kinsella observed. The court had to decide which state’s consumer protection law applied – Iowa, where the plaintiffs lived, or New Jersey, which had no relevant contacts other than that one defendant had one division based in New Jersey. Common sense would tell you that Iowa law would apply, and the court reached that result after carefully applying New Jersey’s choice of law rules. Id. at *19-24. Featuring prominently in the discussion was the recent prescription drug product liability case, Rowe v. Hoffman-La Roche, 917 A.2d 767 (N.J. 2007) – which we spotted (and praised) back when it first came out.  The court ended by disposing quickly of plaintiffs’ unjust enrichment claim for essentially the same reason it rejected the RICO claim. An unjust enrichment claim requires plaintiff to show that the defendant received an unjustified benefit from the plaintiff. But the Hale plaintiffs didn’t give any money or benefits to the defendants; all they did was make their coinsurance payments to their insurers, which did not enrich the defendants. Id. at * 27-28. We are confident that tomorrow will produce more assaults on common sense in drug and device cases, and we will try to bring you each illogical detail. But a simple, clear, logical decision such as Hale shows that common sense in the law, although wounded at times, is not dead yet.