Last Wednesday the First Circuit Court of Appeals, in a split decision, upheld class certification of consumers and insurance companies that alleged they were forced to pay higher prices for Nexium, a heartburn drug, in violation of state antitrust laws. In re Nexium Antitrust Litigation, 2015 WL 265548 (Jan. 21, 2015). The court found that a few uninjured members in a class does not prevent class certification.
The In re Nexium plaintiffs alleged that settlement agreements between AstraZeneca, which sells Nexium, and three generic drug companies violated antitrust regulations. AstraZeneca had sued the generic drug companies, alleging patent infringement of patents relating to Nexium. The so-called “pay to delay” reverse settlement agreements between AstraZeneca and the generic drug companies required AstraZeneca to pay multi-million dollar settlements to the generic drug companies, and required the generic drug companies to refrain from selling generic versions of Nexium until AstraZeneca’s drug patents expired. The plaintiffs in the proposed class alleged that they had been forced to overpay for Nexium as a result of these allegedly anticompetitive settlement agreements. The district court acknowledged that some members of the class may not have suffered injury, but found that the number was de minimis, and explained that the defendant’s expert failed to reliably quantify the prevalence of alleged problematic subgroups to undermine the plaintiffs' contention that the vast majority of class members were injured.
On appeal, the defendants argued that class certification was improper because the class included individuals who were not injured by generic foreclosure—for example, individuals that would have continued purchasing name-brand Nexium even if a generic alternative were available. The defendants argued that as a consequence, reversal was appropriate because the presence of any uninjured class members defeated the Rule 23(b)(3) predominance requirement, reasoning that the existence of an uninjured member precluded the use of common proof at trial.
The First Circuit acknowledged where an individual claims process is conducted at the liability and damages stage of the litigation, the payout of the amount for which the defendants were held liable must be limited to the injured parties. The defendants contended that there was no way to determine which of the class members are brand loyalists and would have continued to purchase Nexium if a generic were available and which class members would have switched to generic. Thus, the defendants argued there was no way to distinguish injured parties from non-injured parties. The First Circuit disagreed, and reasoned that while no mechanism by which to exclude brand-loyalist consumers had yet been developed, it did not mean such a mechanism could not be developed. The court suggested that the consumers could argue for a presumption that consumers would purchase the generic if it were available because this is the economically rational decision. Alternatively, the court suggested consumers could submit individual affidavits attesting to the fact that they would have purchased a generic drug if it were available.
The First Circuit rejected the defendants’ argument that any mechanism of exclusion that requires determination of the individual circumstances of class members is improper and stated that the need for some individualized determinations at the liability and damages stage does not defeat class certification. The court cited the United States Supreme Court’s decision last term in Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 2412, 189 L.Ed.2d 339 (2014) for its analysis of potentially injured class members. The First Circuit explained that in securities cases like Haliburton, investors can recover damages only if they can prove reliance on the defendant’s misrepresentations in deciding to buy or sell a company’s stock. However, a plaintiff securities class can satisfy the reliance requirement at class certification by invoking a presumption of reliance rather than proving a direct reliance for each individual class member. Defendants, though, can rebut the presumption using individualized evidence that the class member did not rely on the integrity of the market price in trading stock. The First Circuit quoted the Haliburton court’s conclusion that “[w]hile [the rebuttal] has the effect of leaving individualized questions of reliance in the case, there is no reason to think that these reasons will overwhelm common ones and render class certification inappropriate under Rule 23(b)(3).” The First Circuit concluded that the Haliburton decision contemplated that a class with uninjured members could be certified if the presence of a de minimis number of uninjured members did not overwhelm the common issues for the class.
Judge William Kenyatta Jr. dissented from the opinion. He first noted that although the percentage of the class that may be uninjured may be “de minimis” the number of uninjured individuals in the class may be as many as 24,000. The dissent criticized the majority for sua sponte suggesting the method for culling uninjured individuals from the class. The dissent observed that at least one other circuit has previously rejected affidavits as an appropriate method for determining class membership. The dissent discussed, at length, the potential practical difficulties in implementing the culling method proposed by the majority, and emphasized that appellate courts do not have the requisite experience to foresee possible issues with the implementation of its proposed method.
Finally, the dissent noted that the majority’s decision impermissibly moves the burden of proof from the plaintiffs seeking certification to the defendants opposing it. The dissent explained that the majority opinion suggests that when a proposed class includes some uninjured members who will have to be removed post-certification, it is the defendants who bear the burden of demonstrating that this cannot be done. The dissent pointed out that this is at odds with Supreme Court precedent holding that the party seeking certification bears the burden of demonstrating the requirements of Rule 23 are satisfied. In this case, the plaintiffs have failed to explain how uninjured members will be removed before judgment—it was the court, sua sponte, that proposed a culling method, not the plaintiffs.
The effect of the In re Nexium ruling is unclear. While the interlocutory appeal was pending in the First Circuit, the district court proceeded to trial on the issue of liability, and a federal jury rendered a defense verdict in the case. Regardless of the impact on the Nexium class action litigation itself, the First Circuit decision raises concerns for class action defendants, suggesting a lower burden for plaintiffs seeking class certification where the class contains uninjured members, and a heightened burden for defendants seeking to defeat it. As we noted in a prior post, given the Justices’ interest in class certification issues in recent years, it is certainly possible that In re Nexium may be before the Supreme Court.