Merck wins dismantling of Vioxx class-action

September 6, 2007, 9:47 PM UTC

This morning the Supreme Court of New Jersey unanimously rejected a nationwide consumer-fraud class-action against Merck (MRK) that had exposed the company to many billions of dollars in potential liability.

The case had been brought on behalf of third-party payers of the costs of consumers’ purchases of Merck’s now-withdrawn painkiller Vioxx. The ruling, entitled International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck, is available here.

The individual plaintiffs — HMOs, health insurance carriers, and union trust funds — can still pursue their cases individually, but not united in a single, block-buster (potentially bank-busting) class action.

Though most state and federal courts nationwide have rejected attempts to bundle personal injury cases into class actions, the viability of consumer class actions like this case (and like the Lights cigarette cases against the tobacco companies) is more of an open question.

In the personal injury context — where an individual might claim, for instance, that Vioxx caused his heart attack — most state and federal courts have held that the issues unique to each individual class member’s claim (like how long did he use Vioxx, what were his other risk factors for heart attack) outweigh the common issues presented (like, were Merck’s warnings inadequate), making such cases unsuitable for class treatment.

In consumer class actions, on the other hand, plaintiffs do not seek reimbursement for their injuries, but only for what they paid to buy the drug. The theory is something like: Had the class member known how unsafe the drug really was, he wouldn’t have bought it, or, alternatively, if he had bought it, he’d have only paid $60 a bottle for it instead of, say, $80. Though such suits are ordinarily worth far less to each class member than a personal injury class action would be, the class action is still worth a tremendous amount to both the plaintiffs lawyer and the defendant, because it allows the aggregation into the class of every single person who ever used the challenged product — including the millions who were concededly never injured by it and, indeed, may have benefited from it.

Since some states have very broad consumer fraud laws — which make companies liable for misleading statements, even without proof that any individual plaintiff was actually misled by the statement — a much stronger argument can be made that consumer fraud suits are truly suitable for class action treatment (common issues of law and fact may, indeed, predominate over issues individual to each class member) and some courts have allowed them.

The case against Merck differed from the typical consumer class-action in two ways. First, the class members were not the individual consumers who took Vioxx, but were rather the third-party payors who reimbursed all or portions of their purchases.

The second difference was that the trial judge, Carol Higbee of Atlantic City, had permitted this case to proceed as a nationwide class, rather than just a state-wide class, which is more common. Judge Higbee ruled that because Merck was based in New Jersey, she could give nationwide application to New Jersey’s Consumer Fraud Act.

She had also allowed the plaintiffs to proceed on a theory that would not have required any proof that each individual class member would have actually behaved any differently had it known the true facts about Vioxx. Instead, a single pricing expert witness would have testified about the total “ascertainable loss” that the whole class suffered as a result of Merck’s alleged misrepresentations. (Merck disparagingly referred to this as a “fraud on the market” theory, referring to a type of damages theory that is usually allowed only in securities fraud class actions.)

Judge Higbee’s rulings, which were upheld by New Jersey’s intermediate appellate court in March 2006, had spooked many New Jersey-based companies — particularly the many pharmaceutical companies there, like Johnson & Johnson (JNJ), Wyeth (WYE), Abbott Laboratories (ABT), and Bradley Pharmaceuticals (BDY) — since they exposed all of them to the prospect of defending nationwide consumer class actions.

Now it won’t happen. In a 5-0 per curiam decision (meaning no judge admits to being the author), the court decided that New Jersey’s Consumer Fraud Act requires much more individualized proof of “ascertainable loss” to each class member than the plaintiffs had planned to prove. “Plaintiff does not suggest that each of these proposed class members,” the court wrote, “receiving the same information from defendant, reacted in a uniform or even similar manner. Rather . . . each third party payor . . . made individualized decisions concerning the benefits that would be available to its members for whom Vioxx was prescribed.”

It specifically rejected the plaintiffs’ streamlined proposal for proving damages. “To the extent that that plaintiff intends to rely on a single expert to establish a price effect in place of a demonstration of an ascertainable loss or in place of proof of a causal nexus between defendant’s acts and the claimed damages,” the court wrote, “plaintiff’s proofs would fail.”

Thus, even assuming for the sake of argument that N.J.’s Consumer Fraud Act could be applied nationwide — an issue the court never decided — the case was not suitable for class action treatment because the issues unique to each class member predominated over common issues. (The case was argued in the New Jersey Supreme Court by Christopher A. Seeger of Seeger Weiss for the plaintiffs, and by John H. Beisner of O’Melveny & Myers for Merck.)

In addition, the court also stressed that the individual class members in this case, because they were, for the most part, well-heeled HMOs or health insurers, were fully able to pursue their cases individually, even if class relief were disallowed. That’s a factor that ordinarily will not be the case when consumer class actions are brought on behalf of ordinary consumers.

What do readers think of this ruling?

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