We have been reporting on third party payer/payor (“TPP”) litigation for a long time. This category covers a range of causes of action and allegations but boils down to boils down to insurance companies or other entities trying to recover amounts they paid for patients to receive medical products because the manufacturers or sellers allegedly did something wrong (e.g., promoted off-label, failed to warn). These cases often follow other litigation against the manufacturers, such as product liability or False Claims Act cases, and involve huge stakes. We have derided some of the statistical mumbo jumbo and arguments used to try to connect the defendant’s conduct to plaintiffs’ decisions to spend what they spent on the products. It seems that just about every successful and/or costly prescription drug ends up the subject of at least some TPP cases. This is true independent of whether the drug represented a major advance or continues to fill an important medical need.
We know that the use of a series of drugs based on thalidomide to treat the cancer multiple myeloma has improved survival rates in a meaningful way. Taking an old compound with well-known teratogenicity issues and re-purposing it (or its enantiomers or metabolites) to treat a virulent cancer has also been a triumph of drug development. Because of teratogenicity risks, the risk minimization measures for these cancer drugs have included limits on how they are distributed and dispensed and heightened surveillance requirements. Perhaps not surprisingly, a whistleblower claimed that the manufacturer promoted off-label use and violated the federal kickback statute. We discussed some of the fights in the resulting False Claims Act case here and a quick search shows that the manufacturer won summary judgment on some but not all the claims. See United States ex rel. Brown v. Celgene Corp., 226 F. Supp. 3d 1031 (C.D. Cal. 2016). Not long after, although it denied wrongdoing, the manufacturer agreed to resolve the case with the U.S., D.C., and twenty-eight states. At least one TPP case followed, with an insurance company suing the manufacturer in Kentucky state court.
In addition to defending the Kentucky case, the manufacturer went on the offensive and brought a breach of contract case against the insurance company’s pharmacy subsidiary in Delaware state court, consistent with the choice-of-law provision in the contract. We have said a few times recently (like here and here) that Delaware courts have expanded their reputation from being savvy in corporate law to being pretty even handed in other areas, including TPP litigation. In Celgene Corp. v. Humana Pharmacy, Inc., C.A. No. N20C-05-145 EMD CCLD, 2023 WL 3944029 (Del. Super. Ct. May 31, 2023), we see the resolution of dueling summary judgment motions in what might be called an anti-TPP case. Of particular interest—and we generally do not find much in contract cases particularly interesting—is that the Delaware court found the opposite of what the Kentucky court had found in permitting its case to proceed as structured. The end result is that the pharmacy owes at least some of the manufacturer’s costs in defending the Kentucky case.
In 2013, the manufacturer and pharmacy entered into a three-year contract to purchase the cancer drugs from the manufacturer, fill patient prescriptions, and provide “a range of administrative services in connection with the Drugs, including maintaining a database which tracked all prescriptions and related patient information.” The pharmacy was paid for the services based on how well it performed in providing them. The contract provided that the pharmacy would indemnify the manufacturer and its officers, directors, and employees from any third-party claim arising out of, inter alia, the pharmacy’s breach of the contract. It also prevented the pharmacy from assigning “any of its rights or obligations” under the contract without the manufacturer’s written consent. To facilitate the Kentucky suit, which was brought while the FCA case was still pending, the insurance company parent—the sole named plaintiff—was assigned all the claims of the pharmacy and “thirty-one other subsidiaries and affiliates.” Obviously, that was done without the manufacturer’s written consent. The Kentucky court allowed the insurance company to sue on behalf of the pharmacy despite the anti-assignment clause in the contract. Then the manufacturer sued in Delaware to make the pharmacy pay for defending the Kentucky case. Got it? This particular fact pattern may seem pretty sui generis, but many TPP cases involve dueling allegations of breach of contracts that likely have indemnity provisions. The TPP plaintiffs forum shop to decide where to sue manufacturers, so maybe it is not so bad if a manufacturer picks which court should decide contract law issues, perhaps a court in the state whose law governs the contract.
From our perspective, and with the leeway we afford ourselves to focus on what we want, there were three issues, each of which was pretty straightforward. First, the pharmacy argued that the right to sue the manufacturer in the TPP case was not one of the “rights” covered in the anti-assignment clause. It was, though, because the clause did not limit or carve out what rights were covered. Nor was there any question that the rights pursued by its parent in the Kentucky suit arose under the contract. Second, under Delaware’s application of the Uniform Commercial Code, the rights under pure sales contracts can be assigned despite contrary clauses, but rights under mixed sales and services contracts cannot. This was clearly a mixed contract because it imposed services obligations on the pharmacy, the pharmacy was paid for them, and the contract’s preamble highlighted the importance of the services. Even though the sales part of the contract involved much for money for the pharmacy than the services part, the services part could not be ignored. Third, the pharmacy claimed that the indemnity clause did not cover litigation costs and fees for the Kentucky case because that case was brought over the manufacturer’s alleged off-label promotion. The court rejected that argument, finding that the breach of the assignment clause caused the manufacturer to “incur (and continue to incur) damages in the form of litigation costs and fees arising from defending itself in the Kentucky action.” This was so even though the parent dismissed pharmacy’s claims back in 2021, after using them to gain standing.
We expect that pharmacy will be on the hook for something less than all of the Kentucky defense costs, and it is unclear if any ultimate recovery in Kentucky, if there is one, will be passed on to the pharmacy. Nonetheless, we view the Celgene decision as suggesting a possible route for at least some medical product manufacturers defending TPP cases to take away some of the sting of that defense.