United States: Innovator Liability – A Word To The Wise

Last Updated: December 11 2017
Article by James Beck

A lot of us attended the annual ACI Drug & Medical Device Litigation Conference in New York City last week. One of the messages sent loud and clear from the initial client round table panel is that our clients don't like surprises, and it is helpful to them to know information about potential litigation possibilities (read: threats), even if they are not current targets.

So that's what we're doing here today – about a topic that wasn't even the topic of a separate presentation at this year's ACI Conference. That threat is innovator liability. For those of you not familiar with litigation jargon, this is the term that litigators, particularly those on our side of the "v.," use for plaintiff-side litigation theories seeking to hold manufacturers of branded drug products liable for injuries caused by competing generic products that our clients didn't make.

Yes, innovator liability is an inherently absurd theory that contravenes the most foundational principle of strict liability – that the manufacturer of a defective product should be responsible for injuries caused by that product. That's why innovator liability is usually brought on a misrepresentation/fraud theory, rather than under "traditional" product liability theories. Because branded manufacturers are required by federal law to allow generic products to take (for free) their labels and use them verbatim, innovator liability theories posit that it is "foreseeable" that "fraud" or "misrepresentation" purportedly occurring with respect to branded labels could lead physicians to prescribe generic drugs bearing the same labeling at some unknown future date. It also lets the actual manufacturer of the allegedly "defective" product that actually caused harm off the hook, even though the manufacturer controls everything else about how the product is manufactured and promoted.

Since 90% or so of the current prescription drug market is generic, innovator liability is a very dangerous – indeed existential – threat to the branded drug industry. Potentially 10% of the prescription drug market share would be forced to shoulder 100% of possible liability, not only with that additional liability bailing out current business competitors, but also being effectively uninsurable because it does not arise from a defendant's own products and is potentially unlimited in both amount and time.

Plaintiffs pursue innovator liability currently for one reason only – the deterrent effect of preemption on claims brought against the manufacturers of generic products. Such preemption is now likely to continue in full effect for the foreseeable future, with the FDA's regulatory attempt to change the rules to eliminate generic preemption now effectively over, and with the threat of additional appointments of anti-preemption Supreme Court justices very likely minimal as well, for the time being.

Innovator liability was not even a separate topic at this year's ACI conference. With good reason. As detailed in our innovator liability scorecard and in our 50 state survey, the defense side has been winning the overwhelming majority of the decisions that have addressed such theories.

Here's the big however.

Most of this litigation so far has been decided in federal court, and in federal court, with jurisdiction based on diversity of citizenship, the Erie principle favoring conservative applications of state law over radical changes has worked strongly to the defense's advantage in federal cases. No federal circuit court has ever recognized innovator liability, and given the state of Illinois law (see our 50 state survey), we don't see the Seventh Circuit becoming the first.

No, the problem is with state courts of last resort, which are not constrained by Erie. So far there have been two high court decisions on innovator liability – and our side's success rate there is only 50%. We lost in Wyeth, Inc. v. Weeks, 159 So.3d 649, 656-76 (Ala. 2014). Weeks was overturned by the legislature almost before the ink was dry, so it looks like a hiccup, but we have to wonder, if it could happen in Alabama, could it happen anywhere? The answer was "no" in Iowa, the only other high court decision so far. See Huck v. Wyeth, Inc., 850 N.W.2d 353, 369-81 (Iowa 2014). Huck, however, was actually a 4-4 split decision that operated as an affirmance only because the defendant had won below, and the Huck justices who saw things our way did so in part (how much a part is unclear) because of the pendency of the FDA's now-dead rule on generic labeling. Id. at 380-81 ("the FDA's proposed rule . . . would abrogate the Mensing holding, permitting consumers of generic drugs to bring a claim against generic manufacturers").

Plaintiffs are aware of this. We're not giving anything away here. They have thus been trying to move the innovator liability theater of litigation operations to state-court appeals for years. And they have finally been able to do so. Right now, the issue is pending in three high courts: California, T.H. v. Novartis Pharmaceuticals Corp., 199 Cal. Rptr.3d 768, 774-82 (Cal. App. 2016), review granted & depublished, 371 P.3d 241 (Cal. June 8, 2016) (discussed here); Massachusetts, Rafferty v. Merck & Co., 33 Mass. L. Rptr. 464, 2016 WL 3064255, at *5-7 (Mass. Super. May 23, 2016) (discussed here), appeal granted, No. SJC-12347 (Mass. 2017); and West Virginia, McNair v. Johnson & Johnson, 694 Fed. Appx. 115, 120 (4th Cir. 2017) (discussed here), certified question accepted, No. 17-0519 (W. Va. Sept. 1, 2017).

The California and Massachusetts appeals have been argued, and we wish we had better news to report. As we discussed, the California argument was mostly about the "perpetual liability" aspects of the case (that the defendant branded company had left the market years before the plaintiff was exposed to a generic product), so there is a distinct possibility that the California Supreme Court will either bypass the basic innovator liability question or worse allow it. In Massachusetts – another notoriously liberal tort jurisdiction – too many members of the Supreme Judicial Court for our liking were asking questions about under what conditions (such as scienter) innovator liability could be permitted. The West Virginia Supreme Court of Appeals is not as radically pro-plaintiff as it was back when it rejected the learned intermediary rule, see Johnson & Johnson v. Karl, 647 S.E.2d 899 (W. Va. 2007). However, one judge remains from the Karl majority, and the situation of generic drug using plaintiffs without anyone they can sue is certainly present. After all, if it could happen in Alabama, it could happen anywhere.

So what happens if the tide starts to turn in 2018 on innovator liability? It certainly could, and because of the magnitude of the potential threat, we can't ignore it. As stated at ACI, our clients don't like surprises, particularly surprise threats, so we're letting you know that from our perspective, the threat is real. Moreover, particularly in California and Massachusetts, we can't expect a legislative fix of the sort that came through in Alabama.

And if state high courts start what the other side could argue to be a "trend," what does that do to the current monolith of federal court decisions?

So what's Plan B?

Congress appears right well paralyzed on any issue like this. Aside from cutting their donors' taxes, we don't expect much there.

That leaves the FDA. Could it be persuaded to issue a regulation preempting innovator liability? There is that 1962 uncodified "direct conflict" preemption clause, and a lot of FDA statements about how its regulatory scheme is not supposed to change the standards of common-law liability. That is one plausible outcome, but plaintiffs would be active, too, demanding an end to preemption of generic products. Does a regulatory fix for innovator liability thus degenerate into a three-way fight between branded, generic, and plaintiffs? That's a recipe for paralysis, as well.

How does one litigate an innovator liability case? Unlike a product liability case, the defendant isn't a manufacturer, so it doesn't have access to design, manufacturing, warning, and adverse report information about the product that actually caused (allegedly) the plaintiff's harm. At minimum that's a serious discovery problem. Will the solution be joining generic drug manufacturers as third-party defendants? That would be a fine finger-pointing mess, and what would the consequences be for preemption? Even the DDLaw Blog might be forced to take sides, which for eleven years we have been able to avoid doing. Who knows, depending on where a plaintiff chose to sue, it might be difficult under BMS to obtain personal jurisdiction over the generic manufacturer. These are just a few of the questions that broader adoption of innovator liability would pose.

We don't like being the ones to point out the dark clouds on the horizon. We'd much rather celebrate defense wins – and we hope we do in T.H., Rafferty, and McNair. But our clients don't like surprises, and given the size of the threat posed by innovator liability, we'd be remiss not to point out what we know/fear is out there. After all, innovator liability is not even on the ACI's own agenda (although it was mentioned) this year. So a word to the wise. Don't be caught napping. Think about Plan B.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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