United States: Never-Ending Liability Under Novartis

The Evolution of Innovator Liability for Pharmaceutical Manufacturers

Brand-name drug manufacturers are not unfamiliar with the concept of Innovator Liability, under which they can be held liable for injuries caused by a product they did not make. In other words, Innovator Liability holds a manufacturer liable by virtue of being an innovator.

Innovator Liability, usually brought under a failure to warn theory, can be traced back to a 2008 California case, Conte v. Wyeth, Inc., where the Court of Appeal held that a branded drug manufacturer's duty to warn extends to patients taking the generic counterpart. The court reasoned that it is foreseeable that physicians and pharmacists may rely on the brand drug's label to prescribe the drug's generic counterpart for patients.1 Conte has been rebuffed nationwide. By July 2014, more than 100 courts in 49 states, including the U.S. Courts of Appeals for six different circuits, rejected Innovator Liability.2 The Supreme Court of Iowa described Innovator Liability as "deep-pocket jurisprudence [which] is law without principle."3

Despite the overwhelming rejection of this theory of law, California continues to breed even more extreme decisions under Innovator Liability. On December 21, 2017, the California Supreme Court decided T.H. v. Novartis Pharmaceuticals Corp. (Novartis). The court unanimously upheld Innovator Liability against a brand-name drug company six years after the company sold all the rights to that drug.4 Furthermore, by a 4-3 decision, the court went beyond Conte to hold that predecessor drug manufacturers can be held liable, as a matter of law, for their successors' failure to warn, because it is foreseeable that the successor company may be just as negligent as its predecessor in fulfilling the duty to warn.5

The Novartis decision creates an open-ended, never-ending liability for brand-name drug manufacturers, and calls for new business strategies to avoid, or reduce, the risk of litigation.

The Novartis Opinion

The product at issue in Novartis was Brethine, a beta-adrenergic agonist used for asthma treatment. Novartis owned the New Drug Application (NDA) of Brethine and manufactured the drug until 2001, when it sold both the drug and its NDA to a successor company.6

In 2007, the plaintiffs' mother was prescribed the generic version of Brethine, terbutaline, for its off-label use of suppressing premature labor. The mother continued taking terbutaline until the end of a full-term pregnancy and gave birth to twin boys, who were later diagnosed with autism. With their father as Guardian ad litem, the twins sued Novartis for failure to warn. Plaintiffs alleged that Novartis knew, or should have known, that Brethine had the effect of penetrating the placental barrier and damaging the fetal brain. Plaintiffs alleged that for many years Brethine had been prescribed for the off-label use of preventing pre-term labor, yet Novartis never updated the drug's label to include the fetal damage side-effect.7

Novartis moved to dismiss the complaint, arguing that, as a matter of law, it did not owe a duty to the plaintiffs because it did not manufacture the drug that the mother took ? terbutaline. Novartis further argued that since 2001 when it sold the NDA of Brethine, it has had no control over the content of Brethine's label. The trial court dismissed the complaint without leave to amend. The appellate court reversed, directing the trial court to grant plaintiffs leave to amend their complaint as to the negligence and negligent misrepresentation claims.8 The California Supreme Court granted review to determine a single issue ? whether, and if so, under what circumstances, a brand-name drug manufacturer may be sued under Innovator Liability, when its drug's label was alleged to be deficient, but the plaintiffs were injured by the drug's generic version bearing the same label?9

The Court answered this question affirmatively, and in two parts:

  • In the first part, the court held that a branded drug manufacturer's duty to warn extends to consumers of the generic bioequivalent. As in Conte, the court based its decision on foreseeability. The court reasoned that if Novartis knew that its label was deficient when it held rights to the drug, it should have foreseen that (1) generic manufacturers would not change the label, because they are required by the FDA to copy the brand drug's label verbatim and (2) physicians or pharmacies would rely on Brethine's label to prescribe terbutaline to patients.10
  • In the second part, the majority addressed the unique issue with Novartis ? the alleged injury occurred six years after Novartis sold the drug and the NDA. The majority held that a predecessor should foresee that its successor may be just as negligent as the predecessor in fulfilling its duty to warn. Noting that 50 percent of Brethine's sales were for the off-label use of preventing premature labor, the majority assumed that Novartis must have been reluctant to include the fetal side-effect in Brethine's warning label for financial reasons. Thus, according to the court, it is foreseeable that the successor will have the same financial disincentive to update the drug's label.11

In the majority's view, a predecessor drug manufacturer and its successor are not categorically distinguishable in their likelihood of being conscientious about their obligations to disclose relevant risks. Under that view, the lapse of time (in this case, six years) from the predecessor's divestiture of the NDA to the time the injury occurred has no bearing on the issue of duty, "which must be addressed at a higher level of generality."12

Risk Considerations for Brand-Name Drug Manufacturers

The Novartis decision creates a warning liability "in perpetuity." The majority provides no guidance as to how long a predecessor will be held liable for its successor's business conduct, or whether a predecessor should foresee the potential negligence of only its immediate successor, or of generations of successors. In addition, the court views the prescription drug market as a unique market "where one entity's misrepresentations about its own product foreseeably and legally contributed substantially to the harm caused by another entity's product."13 Under these holdings, branded drug manufacturers are facing potential litigation arising from products they are making, did make in the past, or have never made, and the potential liability will exist, essentially, forever.

Branded drug manufacturers must take actions to protect themselves from future Novartis-type litigation. Different strategies can be adopted by companies at different stages with respect to the drug. Companies that are manufacturing the drug and own the NDA need to monitor new scientific developments very closely, and the update of the label should be considered whenever new side-effects are discovered. Companies that already sold the drug and the NDA should continue monitoring scientific developments concerning its former product; this can be done in collaboration with the successor company that bought the drug and the NDA, since the company that acquired the NDA now has the ability to update the drug's warnings. It provides additional benefits for the companies to establish a dialogue with the FDA regarding their post-marking surveillance on the drug's side-effects or complications, but of course this needs to be done with extreme caution to avoid being taken as an admission of fault.

Companies that are considering selling their brand-name drugs and divesting the NDAs are at the key stage to take actions to reduce the risk of future Novartis liabilities. Several actions can be taken toward that goal:

  • First, as the Novartis majority advised, indemnification provisions must be in place when the ownership of the NDA is transferred. Although it will not entirely avoid the prospect of extended exposure as the majority assured, an indemnification clause could still help put most of the litigation burden on the actual manufacturer of the drugs ? the generic drug companies.
  • Second, predecessor companies need to conduct more careful due diligence on potential buyers, especially on the buyers' financial resources and approach to safety. It is at least implied in the majority's opinion that the successor company's lack of financial means factored into the determination of foreseeability.
  • Third, before selling its product and NDA, a predecessor company may consider whether it is feasible to revise the label and include in the warnings as many side-effects as the available scientific evidence suggests. Although there is always a risk that overwarning may cause the consumer to disregard the warning label's content, it is still an effective way to avoid future failure-to-warn liability.
  • Lastly, if financially feasible, drug innovators may consider forming a "special-purpose entity" (SPE) for the development, manufacture and distribution of each drug that carries a high risk of severe side-effects.14 A SPE can take the form of a limited liability company, and can be wound up (i.e., discontinued) when the parent company decides to sell the drug. The establishment of a SPE may help to legally isolate the parent company of a high-risk project and to allow other investors to take a share of the risk.

Conclusion

We will continue monitoring and reporting new developments on Innovator Liability. In the meantime, we advise drug manufacturers to work closely with their litigation and corporate counsel to formulate strategies to avoid future Novartis-type litigation.

Footnotes

1 168 Cal.App.4th 89 (Ct. App. 2008).

2 Bexis, Innovator Liability at 100, Drug and Device Law (July 18, 2014). https://www.druganddevicelawblog.com/?s=innovator+liability+at+100

3 Huck v. Wyeth, Inc., 850 N.W.2d 353, 380 (Iowa 2014).

4 4 Cal.5th 145; 226 Cal.Rptr.3d 336 (2017).

5 Id.

6 Novartis, supra, 4 Cal.5th at 158.

7 Id. at 160-162.

8 Id. at 161-162.

9 Id. at 155.

10 Id. at 166-191.

11 Id. at 183.

12 Id. at 183-184.

13 Id. at 180.

14 Sainati, Tristano; Brookes, Naomi; Loatelli, Giorgio (2016-09-19). "Special Purpose Entities in Megaprojects: empty boxes or real companies? Literature Review." Project Management Journal. 48:55-73.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Reed Smith
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Reed Smith
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions