The New Jersey Supreme Court Decertifies a Vioxx Class Action: Part One in a Two-Part Series

Last week, the Supreme Court of New Jersey handed Merck, the giant pharmaceutical company, some good news: It reversed the certification of a class action against Merck, brought on behalf of unions and health plans that had bought Vioxx for their members.

In this two-part series of columns, I will argue that this decision, International Union of Operating Engineers Local No. 68 v. Merck Co. Inc., reveals a lot about how courts around the country have grown disillusioned with the class action, once seen as a "magic bullet" with the potential to help revolutionize civil litigation in America.

The Trend of Financial Damage Suits Arising Out of Personal Injuries

Local No. 68 contains within it all the ironies and all the tensions that characterize modern class action practice. To begin, the suit was brought by health insurers for economic damages. It was not brought on behalf of people who took Vioxx and had heart attacks. The insurers alleged, essentially, that by encouraging them to make Vioxx a preferred pain medication (to the exclusion of other possible choices), Merck defrauded them, because it knew while it was marketing the drug that internal studies were showing that it posed a high risk of causing cardiac arrest.

The suit is clearly parasitic on the much more notorious Vioxx suits, brought by patients, which have been widely covered in the media. It therefore reflects a trend within the plaintiffs' bar to convert conventional and much more emotionally-laden personal injury cases into financial injury cases. I have written about this trend before in the context of the "lights" tobacco cases, and the Holocaust restitution cases. As in those cases, a "hot" story involving a defendant's alleged shocking willingness to kill, enslave, or injure others is turned into a story about the loss of property and a demand for the recognition of someone's economic rights.

Why Spinning Personal Injury Suits As Financial Damages Suits Increases the Chance of Winning Class Action Certification

Why does the plaintiffs' bar often borrow horrific stories about personal injury and convert them into demands for the return of property? Typically, the reason is that plaintiffs' attorneys want to bring the suits as class actions, and class actions are very hard to maintain when they involve personal injuries. This is true for many reasons, but primary among them is that the standard rule for class actions, which governs whether a class can be "certified" for trial, requires that the "common issues" shared by all class members making the same claim against the defendant predominate among all the various issues raised by the case. If there are too few common issues, the reasoning goes, there is little reason for a dispute that affects a group of people to proceed as a class action, rather than as a set of individual suits.

Contrary to popular belief, the typical personal injury case, whether it be regarding asbestos, tobacco, or a defect in car design, does not lend itself to class certification. That is because the different ways individual plaintiffs get injured by a single product are often too varied and unique to allow any common issue to predominate within the purported class. Thus, though hundreds of thousands of asbestos cases have been filed and settled, and billions of dollars paid out in damages, virtually none of that happened as part of a class action. The same can be said about the cases involving tobacco.

The reason that financial injury cases, in contrast, are easier to certify is that, on one level, the question of injury appears to be simpler: A stolen dollar means the same to you, as a matter of law, as it does to me, so damages issues can easily be argued to be common among the members of the would-be class. But this is not the whole story. Class certification for cases involving nothing but money would also be quite difficult, if it were not for the fact that the federal courts and the state legislatures have modified the rules of liability in cases involving pure economic loss in ways that make it easier for classes to be certified.

How Courts Have Made Class Action Certification In Pure Economic Loss Cases Easier

The federal courts have done this most famously with the adoption of something called the "fraud on the market" theory in securities fraud cases. In any kind of fraud case, the plaintiff has to prove that she relied on the defendant's misrepresentations; put another way, reliance is an element of fraud. Reliance is usually a fairly individual matter. It may be easy for a lawyer to prove that a defendant attempted to communicate the same lie to thousands or hundreds of thousands of shareholders and people thinking about becoming shareholders. But that does not mean that the court can assume that each of these persons actually heard the lie, and if they did hear it, relied on it.

The "fraud on the market" theory, however, says that courts can presume that everyone who bought a security in an "efficient" market was affected by the defendant's lie in the same way, since the market, as a whole, sets a price for the security, and the market as a whole is the target of a defendant's lies. Individual proof of reliance thus, the theory holds, is not necessary. If the court accepts the theory's application in a given case, then it is easy to certify a class of buyers under a class action, since the individualized issues of reliance fall out of the case, and common issues can easily predominate.

The problem with the "fraud on the market" is that it has thus far only been accepted by courts (state as well as federal) in the context of securities fraud. Its premise--that a seller who lies to a lot of people is lying to "the market" has been rejected in all other contexts.

That, however, is not the end of the story. Although plaintiffs cannot invoke the theory in pursuing claims under state and federal securities laws, they may be able, by pursuing different claims, to get around the classic reliance requirement another way: Almost every state has adopted some form of consumer fraud statute. The typical state consumer fraud statute does not require that the purchaser relied on a seller's knowing misrepresentation; rather, these statutes simply require that the misrepresentation was the "proximate cause" of the buyer's loss.

The Local No. 68 Case: No Need to Prove Reliance, But a Difficulty in Proving Injury

This brings us to Local No. 68. The trial judge who certified the class in this case applied New Jersey's Consumer Fraud Act, which is pretty typical of this kind of statute. Yet two aspects of the case made it a little odd:

First, the class was made up of a strange group of consumers: not the people who took Vioxx, but the insurers who bought the Vioxx for these people. Is a large (or even a small) health insurer a "consumer"? The trial judge thought so.

Second, it was very hard to say how much the alleged "lies" told by Merck actually cost the insurers. The people who took Vioxx sued Merck, not their insurers. Moreover, the insurers were not middlemen who found they had cases of a useless drug on their hands. So what damage did the insurers suffer?

They argue that they paid too much for Vioxx. The price of Vioxx, they say, would have been lower if Merck hold told the world the truth about the risk of heart attack it posed to some people, since, but logic, if fewer people had been able to take the drug, demand would have been less and the price would have been less.

There is a certain logic to the insurers' argument. Interestingly, however, this logic is identical to the logic used by other plaintiffs' lawyers in the "lights" cigarette cases which I have written about in a prior column. The lights cases have received a relatively cool reception from the state and federal courts, and the Vioxx equivalent of the lights cases just got rejected by the New Jersey Supreme Court. Why?

As I will argue in my next column, in spite of the plain language of many state consumer fraud statutes, judges have become very anxious about allowing plaintiffs to make what are, in essence, "fraud on the market" arguments outside of the securities fraud context. I will argue, moreover, that judicial resistance to giving full scope to the plain meaning of consumer fraud statutes has a lot to do with a growing unease about the role that class actions play in modern society. In addition, I will examine the New Jersey Supreme Court's reasons for rejecting the class in Local No. 68 and link those reasons to arguments that are presented in a new book by Prof. Richard Nagareda of Vanderbilt University School of Law about class actions in modern America entitled Mass Torts in a World of Settlement.