A recent split decision for Merck (NYSE:MRK) in New Jersey found the pharmaceutical company not liable for a plaintiff's heart attack in one case, but negligent in another, awarding the second plaintiff $4.5 million in compensatory damages. As a result, commentators and analysts have begun to openly and aggressively question the company's decision to fight every lawsuit individually.
For one thing, trying each case individually will be expensive. Merck spent $285 million in 2005 to defend against negligence in just the first handful of cases to go to trial thus far. The company has created a reserve of $675 million solely to help defend the way it handled Vioxx. With more than 19,000 plaintiffs collectively filing more than 9,600 lawsuits against the company for Vioxx-related injuries, it seems reasonable to expect that Merck will run through that reserve rather quickly.
In addition, fighting each suit individually exposes the company to some major liability awards. Merck's individual wins don't amount to much, because each new trial has a different set of facts. Losses, however, have a cumulative effect that the next plaintiff can build upon. In the first case that went to trial, which Merck lost, the jury awarded the victim $253 million in damages. The company was only spared having to pay that amount because Texas law caps damages at about one-tenth of that total. Other states where these trials will play out might not have such favorable laws.
For example, New Jersey's consumer-protection laws allow for triple damages to be awarded. A judge recently certified third-party payers as a class in the state, and an appeals court upheld the ruling. This exposes Merck to litigation -- and liability -- from a whole new gaggle of lawyers.
Undoubtedly, Vioxx caused heart attacks in a number of people who are suing Merck. The pharma has admitted that patients who took the drug for more than 18 months are at increased risk for a heart attack. Yet "increased risk" does not mean that Vioxx undeniably caused those ailments. Many of those who are suing had numerous other risk factors that predisposed them to a heart attack. Juries don't seem to have looked favorably upon plaintiffs who took Vioxx for less than 18 months.
Ultimately, it seems the biggest winners here are the trial lawyers. As a shareholder, that's why I support Merck's "try every case" tactic. There's no reason why a corporation needs to be held hostage to the threats of trial lawyers, bullied by a raft of lawsuits to fork over millions, if not billions of dollars in settlements. Merck has undoubtedly reached this point because far too many other companies have caved in to lawyers' demands, saying it's cheaper to pay than fight. That may be true in the short run, but in the long run, it only encourages more costly courtroom struggles.
Even though Merck's stock may be temporarily depressed because of the ongoing legal battles, the company will be better off in the long run if it doesn't give in to the intimidation. Fortunately, Merck has "deep pockets" into which it can dig to fend off many of these attempts at legalized extortion; other companies are not so lucky.
The benefits of Vioxx have been lost in the welter of greedy plaintiffs piling in to get their "payday," but patients may ultimately suffer more pain in the long run; the lawsuits may prompt pharmaceutical companies to keep medicines off the market for fear of running afoul of the trial lawyers. It's quite possible that Pfizer (NYSE:PFE) will encounter similar threats in defending Celebrex against spurious charges.
Merck may have lost another round, and it has a lot more rounds to go; investors should expect to see more losses. But a medicine with benefits that outweigh the risks should not be kept off the shelves, and a company should not be kept down because of the temporary costs associated with defending itself.
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Fool contributor Rich Duprey owns shares of Merck, but he does not own any other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
