02-11-11cary_legalbackgrounder

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George S. Cary is a partner and Steven J. Kaiser is counsel in the Washington, D.C. office of

the law firm Cleary Gottlieb Steen & Hamilton LLP.

Le g a l Ba c k g r o u n d e rWashington Legal Foundation

WLF

Advocate for freedom and justice 2009 Massachusetts Avenue, NWWashington, DC 20036202.588.0302

Vol. 26 No. 4 February 11, 2011

COURT DENIES CERTIFICATIONIN ANTITRUST CLASS ACTION

FRAUGHT WITH BASELESS CLAIMS

byGeorge S. Cary and Steven J. Kaiser

In Sheet Metal Workers Local 441 Health & Welfare Plan v. GlaxoSmithKline, PLC, No 04-5898,2010 U.S. Dist. LEXIS 105646 (E.D. Pa. Sept. 30, 2010), Judge Lawrence F. Stengel denied the plaintiffsmotion to certify an antitrust class of indirect purchasers of the antidepressant Wellbutrin SR against itsmanufacturer GlaxoSmithKline (GSK). Judge Stengel concluded that the class could not be certifiedbecause a significant number of class members did not have claims.

The reasoning of Judge Stengels decision demonstrates how careful and considered analysis canavoid the mistake of allowing dubious or non-existent claims to be swept into a class action to the detrimentof defendants and, often, to other class members. The opinion highlights that a court must undertake avigorous analysis, including engaging in fact finding where there are disputes between the parties and theirexperts. The case makes clear that, unlike in the summary judgment context where the plaintiff is given thebenefit of competing evidence and expert opinion, a motion for class certification requires the court toaffirmatively resolve such disputes, including among experts.

Background. Plaintiffs indirect purchasers of GSKs antidepressant Wellbutrin SR alleged thatGSK violated state antitrust and consumer protection laws by pursuing sham patent litigation to prevent thelaunching of generic versions of Wellbutrin SR. Plaintiffs asserted that but for the sham litigation, genericversions of Wellbutrin SR would have been available more than two years before they were. Plaintiffscontended that the absence of generic competition enabled GSK to maintain higher prices for brandedWellbutrin SR and to prevent consumers from using less expensive generic versions of Wellbutrin SR.

Plaintiffs asked the court to certify a class consisting of indirect purchasers of Wellbutrin SR (i.e.,non-governmental entities that purchased Wellbutrin SR from someone other than GSK). Such purchaserswere defined to include any person who paid all or some of the purchase price. Sheet Metal, at *6.According to the court, [t]his class could include potentially hundreds of thousands of individualconsumers and more than twenty thousand third party payors health benefit plans, health maintenance

organizations, and health insurers, among them who purchased Wellbutrin SR. Id.

The contest over class certification is often a critical part of antitrust litigation because the allegedovercharges suffered by any individual purchaser are often not significant enough to justify the expense oflitigation. When such claims are aggregated in a class, however, they often prompt settlements of tens andhundreds of millions of dollars and sometimes even more. The size of the class can therefore dramatically


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Copyright 82011 Washington Legal Foundation ISBN 1056 30592

affect how much each class member receives and can also affect the total amount for which the defendant isat risk.

The standard for class certification is set forth in Rule 23 of the Federal Rules of Civil Procedure.Where, as in Sheet Metal, money damages are sought, the court must find that, in addition to satisfyingcertain conditions that were readily met in Sheet Metal relating to the size of the putative class and theadequacy of the plaintiffs as class representatives, the questions of law or fact common to class memberspredominate over any questions affecting only individual members, and that a class action is superior to

other available methods for fairly and efficiently adjudicating the controversy. See FED R.CIV.PRO.23(b)(3).

Judge Stengals Decision . Judge Stengal began by highlighting the Supreme Courts admonition inGeneral Telephone Co. v. Falcon, 457 U.S. 147, 161 (1982), that, in ensuring that the elements for classcertification have been established, the court must undertake a vigorous analysis. He noted thatcertification in antitrust cases should not be presumed, but rather must be subjected to the same sort ofvigorous analysis as in other cases. Sheet Metal, at *19.

The court focused on whether plaintiffs had established that injury to each class member aprerequisite for the claims that the putative class sought to assert could be shown by common proof or, inthe alternative, that a class member by class member analysis was required. Were such an individualized

exercise required among the projected hundreds of thousands of class members, common questions of law orfact would not predominate, and class certification would be inappropriate. See Bell Atl. Corp. v. AT&TCorp., 339 F.3d 294, 302 (5th Cir. 2003).

The court observed that whether there was such common impact depended on whether the plaintiffshad shown that prices for [both generic and branded Wellbutrin SR] were affected during the class periodand that all purported class members actually suffered damages as a result of GSKs allegedly anti-competitive activity. Sheet Metal, *19. In considering this issue, the court focused on the Third Circuitsrecent decision inIn re Hydrogen Peroxide Antitrust Litigation , 552 F.3d 305, 311 (3d Cir. 2008), in whichthe Third Circuit held that the task for plaintiffs at class certification is to demonstrate that the element ofantitrust impact is capable of proof at trial through evidence that is common to the class rather than theindividual to its members.

The court noted that, among other things,Hydrogen Peroxide requires courts to be critical of experttestimony and not accept it as dispositive to the class certification question simply because it is admissible.Sheet Metal, at *20. Rather, a court must make factual findings as between competing expert testimony.

The court was presented with such competing expert testimony. The plaintiffs expert, Dr. MeredithRosenthal, opined based largely on economic literature that each and every class member was, one way orthe other, harmed by delayed generic entry because even those who would have used branded Wellbutrin SRwould have enjoyed lower prices had there been generic entry. Sheet Metal, at *30-36.

GSKs expert, Dr. John Bigelow, pointed out that the class, as the plaintiffs defined it, includedmany uninjured parties. As an initial matter, Dr. Bigelow observed that, had GSK faced generic entry, itwould not have promoted Wellbutrin SR as much as it did, particularly directly to consumers. As a result,

GSK argued, some patients would never have been prescribed Wellbutrin SR in the first place, in light ofthe fierce competition in the antidepressant market. Sheet Metal, at *44. GSK argued that patients whochose Wellbutrin SR as a result of the advertising should not be members of the class because theadvertising that caused them to choose Wellbutrin SR would not have occurred in the absence of GSKbelieving it would have ongoing exclusivity.

Dr. Bigelow also disputed the plaintiffs assertion that, with the launch of generic versions ofWellbutrin SR, prices for branded Wellbutrin SR would have changed in a way that would have benefited allclass members. Rather, according to Dr. Bigelow, prices actually increased post entry. As such, any


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member of the class that would not have chosen generic Wellbutrin SR (or have it chosen for them) actuallybenefited from the absence of generic entry and should not be members of the class. Sheet Metal, at *47-50.

Dr. Bigelow also testified that certain putative class members had forms of insurance under whichthey could not have been harmed by the absence of generic Wellbutrin SR. Such insurance includesinsurance that does not require a co-pay for prescription drugs and insurance where the co-pay would havebeen the same whether generic or branded Wellbutrin SR were prescribed (or dispensed). Because suchinsurance would, in effect, hold patients harmless regardless of which type of Wellbutrin SR they

purchased, they could not have been harmed and therefore should not be members of the class. SheetMetal, at *53-57.

The court found that there was another and in some senses even more fundamental flaw in theplaintiffs argument that each class member was adversely impacted. In particular, the court observed that,even assuming GSKs conduct led to unlawfully high prices being charged to GSKs customers, it did notnecessarily follow that each of those customers (numbered in the hundreds) themselves passed on suchovercharges to their own customers or that, even if they did, that the overcharges ultimately reached themembers of the proposed class. Sheet Metal, at *64-65.

The court rejected plaintiffs contention that the courts earlier decision to certify a direct purchaserclass necessarily established such pass through for purpose of the motion to certify an indirect purchaser

class. In essence, the court held that an indirect purchaser plaintiff itself must make a showing ofovercharge to the direct purchasers and that the direct purchaser passed those overcharges on (at least inpart): The end-payor plaintiffs cannot avoid this burden by relying in the work of the direct purchaserplaintiffs. Sheet Metal, at *67. The court noted that the problem it identified that the proposed classdefinition tended to include uninjured parties was not relevant to the direct purchaser class certificationdecision.

Considering all of the evidence before it, including most prominently the disputed expert testimony,the court concluded that the plaintiffs had failed to show on a class-wide basis, (1) that GSK's anti-competitive conduct caused supra-competitive prices for [Wellbutrin] SR and (2) that every end-payorbought [Wellbutrin] SR at a supra-competitive price. Id. at *76. The court found that, for those purchasersof Wellbutrin SR that would have purchased the branded version regardless of a generic alternative, there

was no evidence that the entry of such a generic alternative would have reduced the price of the brandedversion (or caused it to rise more slowly than it otherwise would have). The court further concluded that,because not all direct purchasers necessarily passed through overcharges and because of the variability ininsurance plans, there are presumably significant numbers of third party payors and consumer plaintiffs,who, as a result of their applicable co-payment and co-insurance structures, did not suffer any out-of-pocketlosses. Sheet Metal, at *87. Because of these issues, the court was satisfied the defendant has shownthere are a great number of uninjured class members, that it would therefore take many mini-trials todetermine which of the class members are uninjured. Plaintiffs have failed to show they can exclude theseuninjured consumers. Sheet Metal, at *95.

The court also rejected the plaintiffs proposed method for calculating damages, which would haveused the real world experience that occurred when generic Wellbutrin SR entered the market in 2004.Although the court held that it did not need to resolve the issue, it indicated that it was skeptical of theplaintiffs methodology:

The evidence presented shows there are substantial variations in the pricespaid by individual class members. Different class members purchaseddifferent forms of the drug, either branded or generic. End-payors bought the[Wellbutrin] SR at different times. Insurance plans vary across the class.Certain class members are less price sensitive than others. The plaintiffs useof average prices masks these individual variations. Just because an averageprice was increased or decreased by the alleged foreclosure does not mean that


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all members of the proposed class paid supra-competitive prices or that anydamage for an individual end-payor could be calculated in a formulaic way bycommon proof.

Sheet Metal, at *102.

Analysis. Judge Stengel recognized what is in most instances the single most important issue inclass certification whether the class as defined is limited to parties who actually have a viable claim. If

parties who have not been injured are allowed to be class members, the efficiency-enhancing potential ofclass litigation the aggregation of similar viable claims would be perverted into a means for pursuingclaims that have no basis in law or fact.

Judge Stengel identified numerous reasons why the class as defined would sweep in a large numberof parties with no claim. Under the plaintiffs methodology, these parties purchases would be included inthe ultimate damages assessment, which of course would have directly prejudiced GSK by forcing it to facedamage claims from uninjured class members.

The difficulties that Judge Stengel identified are, of course, present in most indirect purchaserantitrust cases. In particular, the fact that not all direct purchasers are in a position to pass on overchargesis often seen. The issue is particularly acute in ingredient and component cases, where the overchargedproduct is incorporated into a final product by a direct purchaser. Under the courts holding, an indirectpurchaser plaintiff will need to demonstrate that each direct purchaser passed on at least a portion of theingredient or component overcharge in the finished product. This will often be a difficult if notinsurmountable burden, particularly in cases where the ingredient or component represents a relatively smallportion of the value of the finished product or where the downstream market is itself competitive.

Judge Stengel was also careful not to make the all-too-common mistake of accepting a but-forworld that only accounts for certain, pro-certification, factors. In particular, presented with evidence thatGSK would not have marketed Wellbutrin SR to consumers had it expected generic entry and that suchmarketing increased the sales of Wellbutrin SR at the expense of other antidepressants, Judge Stengelproperly concluded that parties who purchased Wellbutrin SR as a result of the marketing would not haveclaims and should not be in the class. (To be sure, Judge Stengel did not rest his denial of class certificationon this conclusion.)

Among the lessons that a party wishing to challenge class certification (whether in the antitrustcontext or otherwise) should draw from the decision are that it should: (1) examine the class definition to seeif it includes parties with no claim, including, for example, parties that were not injured-in-fact; (2)challenge unfounded or poorly reasoned expert testimony on the merits; and (3) not accept the plaintiffsbut for world in assessing suitability for class treatment; but instead (4) present an alternative but-forworld that demonstrates why the class definition is overbroad and, indeed, that there is no way to determinewho should be in a class without resorting to mini-trials. As Judge Stengel held, in class certificationdisputes, parties are entitled to vigorous analysis and factual findings, not the mere rubber stamping of theplaintiffs class certification motion.

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