Pharmaceutical giant Merck (NYSE:MRK) received a double dose of bad news last Friday: It lost an appeal to deny a Vioxx-related class action lawsuit, and its motion for a mistrial in its latest Vioxx jury trial was denied.
Merck is potentially on the hook for at least $11 billion in damages stemming from charges that it misrepresented or concealed the increased risk of heart attacks inherent in its painkiller, Vioxx. That cost could rise dramatically if the company is found guilty under New Jersey consumer fraud laws, which permit triple damages to be assessed.
The first setback for Merck is relatively minor; it stems from two New Jersey patients who charge that Vioxx caused their heart attacks. This closely watched case is the first lawsuit filed by alleged victims who had been on Vioxx for more than 18 months, a duration in which Merck has admitted that the painkiller increases the risk of heart attacks. The pharmaceutical, however, sought to declare a mistrial, since one of the plaintiffs wrote letters to jurors in the case, thanking them for their time. The judge, who has the letters in her possession, denied the motion; she has not yet decided whether to give the letters to the jurors.
The far more troubling class action lawsuit was filed by a union that said it never would have bought Vioxx had it known about the drug's dangers. Merck counters that it did not conceal information from the insurance companies, and that those companies relied upon independent authorities in deciding whether to buy the drug. Arguing against establishing the cases as a class action, Merck said that it provided different sets of data at the various insurers' requests, and that the insurers' cases are not sufficiently similar to be lumped together. The appeals court admitted that managing the class would be a bear of a problem, but nonetheless upheld the lower court's decision to proceed.
The court's decision to certify third-party payors -- like health insurance companies, HMOs, and unions -- is a disturbing development for Merck shareholders. The court decided (and the appellate court upheld) that it was OK to apply New Jersey consumer fraud law to all members of the class, even those from other states, many of which have far different consumer fraud laws than New Jersey. Some members of the class, like the union which brought the action, did not even have decision-making authority on whether to purchase Vioxx.
The ruling has several far-reaching effects. Pharmaceutical companies -- including Merck, Schering-Plough (NYSE:SGP), Bristol-Myers Squibb (NYSE:BMY), Pfizer (NYSE:PFE), and Johnson & Johnson (NYSE:JNJ) -- have just had their liability exponentially expanded. People with whom they had no contact are now permitted to bring suit against them. Rabid trial attorneys can bypass actual victims of injury and jump to a class of plaintiffs with a far more lucrative potential payoff. If third-party payors are allowed to bring suit, they can sue on behalf of everyone for whom they purchased a drug, not just those who were injured. Obviously, that would represent a jackpot for the trial-lawyer lobby.
Though earlier cases could be cited as precedent in arguing that the New Jersey courts erred in establishing this class action, I'm not particularly hopeful that the state Supreme Court will overturn this decision. The ramifications of the rulings are profound and far-reaching, and the cost to Merck could be staggering. I'm also wondering whether pharmaceuticals will still be willing to offer drugs for sale, even those that have received FDA approval, if the potential for crippling lawsuits from third parties can be brought against them.
Paraskevidekatriaphobia is the fear of Friday the 13th; personally, I wonder what fear of Friday the 31st is called. Many Merck investors will most likely come to dread that date, should this ruling stand.
Face your fears with further Foolishness:
- Will Acquisitions Patch Merck's Pipeline?
- Merck Chokes Back Vioxx
- Merck's Bitter Pill
- Vioxx Brings the Pain
- Merck Eases Its Pain
Merck is a recommendation of Motley Fool Income Investor . Pfizer is a recommendation of Motley Fool Inside Value .
Fool contributor Rich Duprey owns shares of Merck but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
