In Re Pharm. Industry Average Wholesale Price Litigation

United States Court of Appeals
For the First Circuit

No. 08-1002

IN RE PHARMACEUTICAL INDUSTRY AVERAGE
WHOLESALE PRICE LITIGATION

THERESA SHEPLEY; LARRY YOUNG,

Plaintiffs, Appellants,

v.

JOHNSON & JOHNSON; CENTOCOR, INC.;
ORTHO-BIOTECH PRODUCTS, L.P.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge]

Before

Howard, Circuit Judge,
Zobel and Lisi,** District Judges.
*

Steve W. Berman, with whom Sean R. Matt, Hagens Berman Sobol
Shapiro LLP, Jeffrey Kodroff, John A. Macoretta, Spector, Roseman
& Kodroff, P.C., Marc H. Edelson, Hoffman & Edelson, Thomas M.
Sobol, Edward Notargiacomo, Hagens Berman Sobol Shapiro LLP,
Kenneth A. Wexler, Jennifer Fountain Connolly and Wexler Toriseva

*
Of the District of Massachusetts, sitting by designation.
**
Of the District of Rhode Island, sitting by designation.
Wallace LLP, were on brief for appellants.
Andrew D. Schau, with whom William F. Cavanaugh, Jr., Erik
Haas, Adeel A. Mangi and Patterson Belknap Webb & Tyler LLP, were
on brief, for appellees.

September 28, 2009
 HOWARD, Circuit Judge. Plaintiffs-Appellants Therese

Shepley and Larry Young, representing a class of nationwide

consumers, appeal from the district court's adverse entry of a

final judgment as to their claims against Defendants-Appellees

Johnson & Johnson; Centocor, Inc.; and Ortho Biotech Products, L.P.

(collectively "J&J"). The appellants contend that the district

court improperly entered judgment against them before trial. For

the reasons that follow, we remand this matter to the district

court.

I. BACKGROUND

This appeal represents just one case in a sprawling,

nationwide multi-district class action involving the pricing of

physician-administered pharmaceutical drugs which were reimbursed

by Medicare, private insurers and patients making co-insurance

payments from 1991 through 2003. The gravamen of the nationwide

litigation against the pharmaceutical companies is that they

unfairly and deceptively inflated the drugs' "average wholesale

prices" ("AWPs"), a price published by the pharmaceutical companies

in various private industry publications and widely used as a

benchmark for reimbursement payments, while simultaneously offering

secret discounts and rebates to physicians. The result of this

scheme was that the AWPs dramatically diverged from the physicians'

actual acquisition costs, a divergence referred to as the "spread,"

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thereby creating a windfall profit for the physicians who bought

the drugs at the lower prices but were reimbursed based on the

higher prices. The plaintiffs further allege that the

pharmaceutical companies exploited this system by "marketing the

spread," by which a company used the prospect of windfall profits

to induce physicians to prescribe its drug, thereby protecting or

increasing market share vis-a-vis competitor drugs. This case

involves just a slice of the larger litigation: the claims against

J&J by Class 1 plaintiffs -- the group of natural persons

nationwide who made co-payments based on AWP for relevant Medicare

Part B drugs.1 For a detailed discussion of this scheme, and of

the district court's case management efforts, see In re

1
"Class 1: Medicare Part B Co-Payment Class" is defined as:

All natural persons nationwide who made,
or who incurred an obligation enforceable at
the time of judgment to make, a co-payment
based on AWP for a Medicare Part B covered
Subject Drug that was manufactured by . . .
the Johnson & Johnson Group (Johnson &
Johnson, Centocor, Inc., Ortho Biotech,
McNeil-PPC, Inc., and Janssen Pharmaceutica
Products, L.P.). Excluded from the Class are
those who made flat co-payments, who were
reimbursed fully for any co-payments, or who
have the right to be fully reimbursed; and the
residents of the states of Alabama, Alaska,
Georgia, Iowa, Kentucky, Louisiana,
Mississippi, Montana, and Virginia (where
consumer protection statutes do not permit
class actions).

In re Pharm. Indus. Average Wholesale Price Litig., 233 F.R.D. 229,
230 (D. Mass. 2006) (footnote omitted).

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Pharmaceutical Industry Average Wholesale Price Litigation, No. 08-

1056, ___ F.3d ___, slip op. (1st Cir. Sept. 2009), and In re

Pharmaceutical Industry Average Wholesale Price Litigation, 491 F.

Supp. 2d 20 (D. Mass. 2007). This opinion assumes familiarity with

those two decisions.

As part of the broader litigation, the district court

held a twenty-day bench trial adjudicating the claims of the Class

2 and Class 3 plaintiffs, see In re Pharm. Industry Average

Wholesale Price Litig., 233 F.R.D. 229, 231 (D. Mass. 2006)

(defining Classes 2 and 3), against a set of pharmaceutical

companies, including J&J. See In re Pharm., 491 F. Supp. 2d at 31

("This bench trial involved two Massachusetts classes. One class,

Class 2, consists of third-party payors ('TPPs') in Massachusetts

that reimburse Medicare beneficiaries for their statutory twenty

percent coinsurance obligations under Medicare, known as Medigap

insurance or supplemental insurance. The other class of

plaintiffs, Class 3, consists of all third party payors,

end-payors, consumers who make coinsurance payments, and consumers

who have no insurance for these drugs in Massachusetts and who pay

for drugs based on AWP." (footnotes omitted)). In June 2007, the

district court entered a split judgment, finding in favor of the

Class 2 and 3 plaintiffs as to some of the defendants but not

others. Id. at 31-32 (summarizing findings).

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 J&J was one of the victorious defendants. Although the

district court noted that the company's conduct was "at times

troubling," it ultimately found that J&J's conduct had not damaged

the class because the spread for the two relevant J&J-manufactured

drugs, Procrit (epoetin alfa) and Remicade (infliximab), had not

substantially exceeded industry expectations about the size of the

spread, and therefore J&J's conduct did not rise to the level of

egregiousness necessary to trigger liability under Massachusetts

General Laws Chapter 93A ("Chapter 93A"). Id. at 31, 103-04. In

reaching this conclusion, the district court rejected the Class 2

plaintiffs' contention that any spread at all should trigger

potential liability for the defendants (an approach that the court

labeled the "per se" liability theory), and instead applied a 30%

"speed limit" or "yardstick" for potential liability, whereby only

spreads that exceeded 30% would trigger potential liability. The

30% potential liability trigger was also applied to the claims of

the Class 3 plaintiffs. Because the spreads for Procrit and

Remicade were approximately 30% or less during the class period,

the district court declined to find liability as to either Class 2

or Class 3.

On the strength of those findings, during a July 2007

conference relating to the Class 1 plaintiffs' claims against the

Bristol Myers Squibb Company (which ultimately settled before

trial), the district court characterized its post-trial findings as

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having cut off the claims of the Class 1 plaintiffs against J&J.

Specifically, the following exchange occurred between the district

court and Steve Berman, the attorney representing the Class 1

plaintiffs:

THE COURT: . . . So, there will be no
more trials with respect to the first five
defendants in Track 1 with respect to, as I
understand it, Class 1. . . .

. . . .

MR. BERMAN: There’s one issue on Track
1, your Honor.

THE COURT: Yeah?

MR. BERMAN: And, that is Johnson &
Johnson. I know that you said that their
drugs didn’t exceed the 30 percent rule for
the purposes of Class 2 and 3. But, it’s our
position -- and we would like the opportunity
to present this or maybe you’ve already
decided -- that the 30 percent would not apply
to [Class] 1.

THE COURT: I thought I ruled that.
The 30 percent did apply to Track -- to Class
1.

MR. BERMAN: Well, you have a footnote
that talks about -- implies that, but you did
not rule in that way. That’s your ruling,
that we have no J & J Class 1 trial.

THE COURT: I thought it was not a
footnote. I thought I went on and on about
it. I think I went on and on about
everything. So, maybe I ought to look at it
again.

MR. BERMAN: I don’t think you did --

THE COURT: I think I said that I
rejected plaintiffs’ position that the per se

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liability for Class 1 and that I thought that
the 30 percent speed limit should apply to
Class 1 as well. And, that would be, I
thought applicable to all of the defendants.
So why is that not clear?

MR. BERMAN: Well, I didn’t see that in
your order, your Honor.

THE COURT: They’ve got it.

MR. BERMAN: At the time we negotiated
the -- via that [BMS] settlement, both sides
thought that was a risk that could go either
way. And, we discussed that with the
mediator. The mediator didn’t think that it
was clear either.

THE COURT: Well --

MR. BERMAN: It’s clear now.

THE COURT: It’s clear now. And, I
will look at it again. If it wasn’t clear, it
is clear. The 30 percent speed limit applies
to Class 1.
I rejected a per se position. And, I
have to go look through it again, because I
thought it was clear. That’s why I
essentially had the expert go back and
calculate the damages again. Because, the way
he did it was he aggregated all the years when
he did it with the 30 percent speed limit. He
didn’t back out the -- it might have been
statute of limitations and on the specific
[drugs]. That’s why I needed a root
calculation.
Otherwise, I could have done it.
Right? On the per se. Because, he did it
year by year.

MR. BERMAN: Correct, you could have,
yeah.

THE COURT: I could have done that. I
mean . . .

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 MR. BERMAN: But, we felt it was a
different issue with the consumers, because
there’s no evidence that they had any
knowledge of the so-called industry norm of
20, 25 percent.

THE COURT: Well, I ruled to the
contrary and I don’t accept that position.
And, I thought it was clear. If not, I’m
making it clear now.

Seizing on this colloquy, J&J began asking the district

court to officially seal the fate of the Class 1 plaintiffs'

claims: in August 2007, J&J moved for final judgment under Fed. R.

Civ. P. 54(b) (allowing the district court to enter final judgment

as to "one or more, but fewer than all, claims or parties" in a

multi-party or multi-claim lawsuit); the next month, J&J submitted

a proposed order concluding that "no reasonable jury could find

that the J&J Defendants' conduct violated the consumer protection

laws applicable to the Class 1 claims"; and in November 2007, J&J

again moved the district court for final judgment, asking it to

effect its "stated intention to enter judgment in favor of the J&J

Defendants with respect to Class 1" and proposing the same

conclusion that "no reasonable jury could find that the J&J

Defendants' conduct violated the consumer protection laws

applicable to the Class 1 claims."

The Class 1 plaintiffs' responses to these efforts appear

to have taken two different positions. In one response, filed by

Attorney Donald Haviland, Jr. on behalf of the "Class 1 and Class

3 Consumers," the Class 1 plaintiffs argued that the entry of

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judgment against them would "unfairly and inappropriately limit"

their right "to adjudicate their claims fully." A separate, later

filing by the other attorneys representing the plaintiffs,

including Mr. Berman, stated that the "[p]laintiffs . . . neither

consent to, nor oppose" the requested relief, but nonetheless

argued, inter alia, that the Class 1 plaintiffs' claims had never

been adjudicated, and noted that the district court had not made

the finding proposed by the Track 1 defendants.2 The latter filing

therefore requested that the Track 1 defendants' proposed finding

be omitted from the district court's order.3

The district court ultimately entered a final judgment

pursuant to Rule 54(b) stating that "the Class 2 and 3 claims

against . . . the J&J Defendants . . . proceeded to a bench trial

before the Court in November of 2006," and that "[t]he Court . . .

dismissed the claims against the J&J Defendants." The order

continued:

As to the J&J Defendants, the Court ruled,
among other things, that although J&J’s
conduct was troubling, it did not violate

2
The "Track 1" defendants, including J&J, were the first
defendants in the multi-district litigation to proceed to trial.
See In re Pharm. Industry Average Wholesale Price Litig., 230
F.R.D. 61, 65 n.1 (D. Mass. 2005).
3
At oral argument before us, counsel for J&J noted that
allowing a single class to take two conflicting positions, as the
Class 1 plaintiffs arguably have here, has the potential to create
unusual, even novel, difficulties. J&J did not press this point at
argument or in its brief, however, and therefore we need not
explore it here.

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 Mass. Gen. Laws ch. 93A, in part because the
spreads on the J&J Defendants’ subject drugs
(Procrit® and Remicade®) never substantially
exceeded the range of spreads generally
expected by the industry and government. [In
re Pharm.,] 491 F. Supp. 2d at 104. As a
result, the Court ruled that the claims of
Class 2 and Class 3 should be dismissed. Id.
at 109. The claims by members of Class 1 are
dismissed for the same reason.

The order did not include the Track 1 defendants' proposed finding

that "no reasonable jury could find that the J&J Defendants'

conduct violated the consumer protection laws applicable to the

Class 1 claims."

The Class 1 plaintiffs, which include neither industry

nor government, appeal.

II. STANDARD OF REVIEW

We begin by noting that the district court's use of the

word "dismissed" in its November 2007 order entering judgment, and

the fact that it made its findings as to Class 1 after the bench

trial involving the Class 2 and 3 plaintiffs, admits of some doubt

as to the precise procedural grounding of the judgment. At oral

argument, counsel for J&J represented, without objection, that the

district court's judgment was entered in accordance with Federal

Rule of Civil Procedure 56. The district court, however, made no

explicit reference to that Rule, or to summary judgment in general.

Although we consider here the consequences of this having been a

summary judgment, ultimately we believe the wisest course is to

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remand to the district court for further explanation of its ruling

and, if necessary, additional proceedings.4

We review a grant of summary judgment de novo, drawing

all reasonable inferences in favor of the non-moving party.

Sullivan v. City of Springfield, 561 F.3d 7, 14 (1st Cir. 2009).

"Summary judgment is appropriate where there is no genuine issue as

to any material fact and the movant is entitled to judgment as a

matter of law." Id. (citing Fed. R. Civ. P. 56(c); New Fed

Mortgage Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 543

F.3d 7, 11 (1st Cir. 2008)) (internal quotations omitted).

III. DISCUSSION

On appeal, the appellants argue that the district court

erred by extending its findings from the bench trial to extinguish

the Class 1 plaintiffs' claims against J&J. It is undisputed that

the bench trial adjudicated only claims of Classes 2 and 3, not

Class 1. Consequently, it is also undisputed that the Class 1

representative plaintiffs did not participate in the trial.

Finally, it is clear from the record that the imposition of that

trigger was based on the district court's fact findings as to how

4
Application of the Rule 56 rubric makes some sense, in so far
as application of Rule 12 would be seemingly impossible under the
circumstances, and judgment after trial under Rule 58 would make
little sense given that the instant plaintiffs were not part of the
trial.

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large a spread the Class 2 and Class 3 plaintiffs expected. See

generally In re Pharm., 491 F. Supp. 2d 20.

Against this backdrop, the district court's decision to

apply its trial findings to impose the 30% potential liability

trigger to the Class 1 plaintiffs, leading to entry of judgment as

to the Class 1 plaintiffs' claims against J&J, appears problematic.

The 30% potential liability trigger, which was derived from the

testimony of Dr. Raymond Hartman, represented two sequential

decisions by the district court: first, acting as a gatekeeper

under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993),

the district court admitted Dr. Hartman's testimony about industry

expectations into the record evidence; second, acting in its

capacity as factfinder, the district court credited that testimony

and adopted the 30% potential liability trigger. Both of these

decisions were within the power of the district court.

In extending these findings to necessarily encompass the

expectations of the Class 1 plaintiffs, however, the district court

may have exceeded its power. Unlike the Class 2 and Class 3

plaintiffs, whose claims under Chapter 93A were determined in a

bench trial, it is undisputed that the Class 1 plaintiffs were not

represented before the court in the previous trial. Additionally,

unlike the Class 2 and 3 plaintiffs who all proceeded under Chapter

93A, the Class 1 plaintiffs include members who set forth claims

under various state laws, some of which contain jury trial rights.

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As a result, while the district court was empowered to find facts

as to the former two classes, it had no basis upon which to apply

those findings to the latter class.

To enter summary judgment against the Class 1 plaintiffs,

the district court would have first had to view the facts in the

light most favorable to the plaintiffs as the nonmoving party, see

First Marblehead Corp. v. House, 473 F.3d 1, 3 (1st Cir. 2006),

which is a very different enterprise from the factfinding engaged

in at a bench trial. Rule 56 also requires that the district court

conclude that there are no genuine issues as to any material fact.

Yet the factfindings at the bench trial as to the Class 2 and Class

3 plaintiffs' expectations regarding the size of the spreads were

not made with any deference to the Class 1 plaintiffs' potential

evidence, and nothing in the record suggests that the district

court applied the deferential standards required by Rule 56 at the

July 2007 hearing or when it entered its judgment on the Class 1

plaintiffs' claims against J&J. Moreover, rather than making the

necessary finding that there were no genuine issues of material

fact, the district court actually deleted language to this effect

("no reasonable jury could find that the J&J Defendants' conduct

violated the consumer protection laws applicable to the Class 1

claims") from the defendants' proposed order. The court also found

in its June 2007 post-trial order that the issue of what liability

trigger to use for Remicade -- an issue that turned on ascertaining

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the appropriate industry expectations -- was a "close call," In re

Pharm., 491 F. Supp. 2d at 104, thus indicating that, had the court

applied the Rule 56 standards, it might well have found there to

exist a genuine issue of material fact. For these reasons,

entering summary judgment as to the Class 1 plaintiffs' claims

against J&J, on the record as we understand it, would have been

error.

J&J's arguments to the contrary are unpersuasive. Its

contention that the claims of Class 1 were not materially different

from the claims of Class 2 and the consumer members of Class 3 says

nothing about the different role of the district court in

adjudicating those claims in the context of a jury trial. Its

characterization of the district court's decision to adopt the 30%

potential liability trigger as "legal" (and therefore outside the

purview of the jury) fails to account for the fact that the

creation of the 30% trigger depended on factual findings relating

to the relevant expectations as to the size of spreads. And

elsewhere we have rejected J&J's arguments that the district

court's adoption of a 30% potential liability trigger was erroneous

as a matter of law; those arguments do not provide "alternative

grounds" for affirming the district court, as urged by J&J. See In

re Pharm., No. 08-1056, ___ F.3d ___, slip op.

None of this is to say, however, that the judgment issued

by the district court cannot be sustained or that this case must

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necessarily proceed to trial on the Class 1 plaintiffs' claims

against J&J. If the Rule 54 judgment on the Class 1 claims was

intended to address only those claims brought under Ch. 93A, then

the judgment seemingly does not reach Class 1 claims arising under

other states' consumer protection laws that may provide for trial

by jury. Additionally, if the Class 1 plaintiffs have evidence

(for example, about relevant expectations with respect to

reasonable spreads in the context of the spreads' impact on

consumer payments), then the district court ought to have a proffer

of such evidence to assist it in deciding whether to grant a

properly framed summary judgment motion. As the Class 1 plaintiffs

were not participants in the bench trial, the record is lacking

with respect to whether the plaintiffs have any such relevant

evidence on a material issue. Again, nothing in this opinion

should be understood to preclude the district court from entering

judgment under Rule 56 on behalf of J&J as to the Class 1

plaintiffs' claims. But if the district court does decide to enter

summary judgment, it must do so only after affording the Class 1

plaintiffs the protections to which they are entitled under Rule

56.

IV. CONCLUSION

Because we lack a clear understanding of both the scope

of the district court's judgment and the reasons for the judgment,

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we will remand to the district court for additional explanation of

its judgment. Although we have considered retaining jurisdiction

over the matter, in light of the fact that the district court may

find it necessary to take action beyond providing an explanation,

we instead VACATE and REMAND. The parties' rights to appeal are

preserved.

No costs are awarded.

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