In re Pharmaceutical Indus. Average Wholesale

• Decision Date: 19 November 2009
• Docket Number: No. 09-1196.,09-1196.
• Citation: 588 F.3d 24
• Parties: IN RE PHARMACEUTICAL INDUSTRY AVERAGE WHOLESALE PRICE LITIGATION M. Joyce Howe, Plaintiff, Appellant, v. Leroy Townsend, Plaintiff, Appellee.
• Court: U.S. Court of Appeals — First Circuit

588 F.3d 24

IN RE PHARMACEUTICAL INDUSTRY AVERAGE WHOLESALE PRICE LITIGATION M. Joyce Howe, Plaintiff, Appellant, v. Leroy Townsend, Plaintiff, Appellee.

No. 09-1196.

United States Court of Appeals, First Circuit.

Heard October 8, 2009.

Decided November 19, 2009.

Donald E. Haviland with whom Michael J. Lorusso and The Haviland Law Firm, LLC were on brief for the appellant.

Steve Berman with whom Sean R. Matt, Thomas M. Sobol, Edward Notargiacomo, Hagens Berman Sobol Shapiro LLP, Kenneth R. Wexler, Jennifer Fountain Connolly, Wexler Wallace LLP, Jeffrey Kodroff, John A. Marcoretta, Spector, Roseman, Kodroff & Willis P.C., Marc H. Edelson, and Hoffman & Edelson were on brief for the appellee.

Before LYNCH, Chief Judge, TORRUELLA and HOWARD, Circuit Judges.

LYNCH, Chief Judge.

One unhappy named plaintiff appeals from an order approving a $24 million class action settlement in one multidistrict litigation, in which class members allege that AstraZeneca Pharmaceuticals LP (AstraZeneca) published artificially inflated prescription drug prices. In re Pharm. Indus. Average Wholesale Price Litig., MDL No. 1456, Civ. A. No. 01-12257, 2008 WL 7085766 (D.Mass. Dec. 15, 2008) (order approving final settlement) (In re Pharm. Final Settlement Approval). The settlement is between AstraZeneca and a class of consumer plaintiffs who claimed they overpaid Medicare co-payments because AstraZeneca inflated the price of Zoladex.

M. Joyce Howe, one of the class representatives for the AstraZeneca consumer subclass, appeals. The other AstraZeneca subclass representative, Leroy Townsend, asks us to uphold the settlement. Howe argues that the settlement must be rejected on the grounds that it creates a cy pres fund of up to $10 million rather than distributing all recovery to class members; that the settlement is not fair, reasonable, and adequate because its method for calculating and distributing class members' damages is flawed; and that the parties allegedly improperly negotiated fees simultaneously with the settlement. Howe failed to raise the last argument before final approval of the settlement.

Howe also argues to us two procedural objections she did not make in the district court. Howe contends the district court's order approving the settlement, which expanded the settlement class, did not sufficiently define the new class and its claims as required by Rule 23(c)(1)(B). Howe also argues that the district court did not properly reappoint class counsel under Rule 23(g), see Fed.R.Civ.P. 23(g), when approving the expanded settlement class.

The cy pres and Rule 23(c)(1)(B) issues are ones of first impression for this court. We find Howe's challenges meritless and affirm the district court, which handled this matter with great sensitivity and care.

I.

This appeal is in one case of a series of class actions alleging pharmaceutical companies fraudulently inflated a figure known as the "average wholesale price" (AWP) between 1991 and 2003 to boost sales.¹ This court has already decided other appeals from these multidistrict litigations and related cases. See In re Pharm. Indus. Average Wholesale Price Litig., 582 F.3d 231 (1st Cir.2009); In re Pharm. Indus. Average Wholesale Price Litig., 582 F.3d 156 (1st Cir.2009); Nat'l Ass'n of Chain Drug Stores v. New England Carpenters Benefits Fund, 582 F.3d 30 (1st Cir.2009); U.S. ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13 (1st Cir. 2009).

The healthcare industry treated the AWP, which pharmaceutical companies self-reported, as the sticker price for drugs. Insurers used AWPs to decide how much to reimburse providers when patients obtained drugs, which in turn affected patients' co-payments. Most of the drugs involved in these litigations are expensive drugs for serious illnesses, including cancer. The drug involved in this appeal, Zoladex, is commonly used to treat prostate cancer. Consequently, Medicare, insurers, and patients allegedly overpaid by many millions of dollars for critical treatments based on manipulated AWPs.

A coalition of citizen, healthcare, senior citizen, and consumer advocacy groups sued dozens of drug manufacturers and healthcare-product companies² in the District Court for the District of Massachusetts on December 19, 2001. Similar lawsuits were filed across the country, and on April 30, 2002, the Judicial Panel on Multidistrict Litigation consolidated the lawsuits and assigned the case to the District Court for the District of Massachusetts. In re Immunex Corp. Average Wholesale Price Litig., 201 F.Supp.2d 1378, 1379-81 (J.P.M.L.2002).

The district court ultimately divided the multidistrict litigation into two tracks, a fast track (Track One) and a normal track (Track Two). Track One included three classes. One of the three—Class 1, called the Medicare Part B Co-Payment Class— consisted of patients covered by Medicare Part B who made co-payments for these drugs. A subclass of Class 1, which sued AstraZeneca for inflating the price of Zoladex, is involved in this appeal.

The Medicare Part B Co-Payment Class alleged that the defendants violated state consumer protection statutes by artificially inflating AWPs. Between 1992 and 2005, Medicare Part B reimbursements were based on published AWPs under federal law.³ Medicare covered 80 percent of this cost, requiring patients to make a 20 percent co-payment.

Most patients had supplemental insurance that covered some but not all of this co-payment. Those who had supplemental coverage for the full co-payment were excluded from the class. Most class members had Medigap insurance that covered 80 percent of the 20 percent co-payment (leaving patients to pay 20 percent of the 20 percent Medicare co-payment). Thus patients in the class were differently affected depending on whether they had supplemental insurance and how much of the co-payment that insurance covered.

On August 16, 2005, the district court denied some proposed classes and deferred certifying the Medicare Part B Co-Payment class until the plaintiffs located individuals to act as class representatives. In re Pharm. Indus. Average Wholesale Price Litig., 230 F.R.D. 61, 96 (D.Mass.2005) (order partially denying and partially deferring class certification) (In re Pharm. Preliminary Class Certification).⁴ The court issued the order after carefully analyzing whether the Medicare Part B Co-Payment Class, as well as all proposed Track One classes, met the requirements for class certification under Rule 23 of the Federal Rules of Civil Procedure. Id. at 76-96. The plaintiffs filed an amended complaint in October 2005 that reflected the court's instructions.

The district court certified the Medicare Part B Co-Payment Class under Rule 23(b)(3) of the Federal Rules of Civil Procedure on January 30, 2006. In re Pharm. Indus. Average Wholesale Price Litig., 233 F.R.D. 229, 230-31 (D.Mass.2006) (order granting and denying class certification) (In re Pharm. Class Certification). It defined the class as "[a]ll 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 defendants, including AstraZeneca, between January 1, 1991, and January 1, 2005. Id. at 229-32 (footnote omitted). The court excluded residents in nine states whose consumer-protection statutes did not create a cause of action, unlike the law in states whose residents were certified as class members. Id. at 230. It certified class counsel under Rule 23(g). Id. at 232.

The court divided the plaintiffs into four subclasses according to which pharmaceutical-company defendant had distributed the subject drugs to them. Id. at 230. The court certified Howe⁵ and Townsend as subclass representatives for the class members suing AstraZeneca. Id.

After months of intense litigation and negotiation, AstraZeneca and the Zoladex subclass reached a final settlement in May 2007, on the eve of trial.⁶ That settlement is at issue in this appeal. The plaintiffs' expert had calculated the class's damages were $31,128,851. In the settlement, AstraZeneca agreed to pay $24 million in total compensation to all class members or, for deceased class members, to their spouses or the legal representatives of their estates. In an effort to achieve a comprehensive settlement, the parties also agreed AstraZeneca would pay the consumers from nine states who had previously been excluded from the class. If the amount of submitted claims exceeded $24 million, class members' recovery would be reduced proportionally.

AstraZeneca also promised to pay all costs of distributing this money as well as $8.7 million in attorneys' fees and costs, representing about one-third of the settlement amount. The parties agreed AstraZeneca would pay fees and costs separately and not deduct that from the class members' $24 million recovery.

The parties expected a large portion of the total sum AstraZeneca was willing to pay would go unclaimed. Because Zoladex is used to treat prostate cancer, many class members were elderly, had died, or could die soon, and not all of them could be found. The parties addressed this issue through two mechanisms.

First, rather than paying the money up front into a fund that would distribute money to class members, AstraZeneca agreed to pay class members only on a comparatively easy claims-made basis. Class members only had to submit relatively minimal proof of when they took Zoladex. Then, based on a formula created by the plaintiffs' expert, class members would receive compensation for double their actual losses. Because the formula tried to calculate actual losses, it calculated the damages of class members who had supplemental insurance were 20 percent of their 20 percent Medicare co-payment, based on the average Medigap coverage that class members had.

Second, the parties agreed to create a fund, called a cy pres fund, that would pay any amount...