Rohn v. TAP Pharmaceutical Products, Inc.

Citations: 677 F.3d 21; 2012 WL 1413372; 2012 U.S. App. LEXIS 8263Docket: Nos. 10-2494, 11-1329

Court: Court of Appeals for the First Circuit; April 24, 2012; Federal Appellate Court

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Appellants, known as the Samsell plaintiffs, are part of a larger group alleging fraud related to the overcharging for the medication Lupron. They, along with insurers and healthcare providers, reached a significant settlement of $150 million, with $40 million designated for consumers. Any unclaimed funds from this consumer settlement would be redirected to a cy pres fund for distribution at the trial judge's discretion. The Samsell plaintiffs are appealing the district court's allocation of $11.4 million from this fund to the Dana Farber/Harvard Cancer Center and the Prostate Cancer Foundation for research related to diseases treated by Lupron. Although the Samsell plaintiffs have recovered over 100% of their actual damages, they seek to increase their payout through various legal arguments. The award is supported by the broader plaintiff class and the recipient organizations, while the defendant, TAP Pharmaceutical Products, has not contested the decision. The excerpt also highlights the procedural and substantive standards for cy pres fund distribution, with the court expressing concerns about federal judges' discretion in such allocations. In parallel, TAP had faced criminal charges for violating the Prescription Drug Marketing Act by encouraging improper billing practices for Lupron, leading to significant financial penalties and subsequent class action lawsuits from consumers and insurers seeking recovery for overpayments. The district court dismissed conspiracy claims under RICO against physicians due to insufficient allegations regarding their involvement in a fraudulent scheme.

The district court permitted the remaining RICO conspiracy claims to proceed and was informed on October 11, 2004, that the MDL parties had reached a settlement agreement with all plaintiff groups, prompting a motion for preliminary approval. Valerie Samsell, a consumer, intervened on November 4, 2004, to participate in evaluating the proposed settlement. The district court preliminarily approved the settlement and class on November 24, 2004. A three-day fairness hearing in April 2005 allowed Samsell to present witnesses, depositions, and objections, notably regarding the inadequacy of the settlement amount for consumer purchasers of Lupron. On May 12, 2005, the district court found the settlement fair and certified the class, allocating $40 million to consumer purchasers from a total of $150 million. Consumers were set to recover either 30% of their total out-of-pocket expenses for Lupron or $100, whichever was greater. Although the exact size of the consumer class was uncertain, it was estimated to include tens or hundreds of thousands due to high prostate cancer mortality rates. The court's approval was influenced by expert testimony indicating that the settlement favored consumers, who were allocated approximately 27% of the total settlement despite their claims accounting for only 9% to 13% of overcharges. The settlement aimed to reimburse consumers 100% of their estimated overcharge. Provisions were included for potential shortages or surpluses in the consumer fund, allowing for pro rata reductions or discretionary distribution of unclaimed funds. After the settlement approval, the Samsell plaintiffs indicated plans to appeal unless more was provided, leading to an 'implementation agreement' among all parties.

The implementation agreement increased consumer payments for Lupron from 30% to 50% of out-of-pocket expenses, resulting in consumers receiving 167% of the damages previously determined by the district court. In exchange, the Samsell plaintiffs and other objectors agreed to withdraw their appeals, rescind opt-out requests, participate in the claims process, and waive rights to appeal the final judgment. The agreement included incentive payments for some objectors and allowed for attorney fee requests. On August 26, 2005, the district court approved the modified settlement, which included a national notice campaign aimed at reaching 80% of the consumer class through various media, resulting in approximately 11,000 claims filed—far fewer than expected due to high mortality rates within the class. This left around $11.4 million unclaimed. During a January 13, 2009, hearing, the district court expressed its intent to distribute these funds responsibly for the benefit of the class and proposed three options: additional compensation to claimants, a supplemental claims process, or a cy pres award for research related to Lupron. The judge disclosed his affiliation with Vincent Memorial Hospital while considering a proposal from the Loughlin Group, which was not contested by the Samsell plaintiffs. On May 19, 2009, the court decided to make a cy pres award for research into Lupron-related conditions and invited the Loughlin Group to submit a proposal. The Samsell plaintiffs appealed this decision, but the appeal was dismissed due to lack of jurisdiction over a non-final order.

DF/HCC petitioned the district court regarding unclaimed funds from a May 19, 2009 order, which the court subsequently granted. On May 25, 2010, the court invited public comments on proposals from both DF/HCC and the Loughlin Group. On August 6, 2010, the court decided to award all unclaimed settlement funds to DF/HCC in three installments, rejecting a supplemental claims process due to its high cost, time consumption, and low likelihood of attracting new claimants. The court's decision was informed by four main considerations: DF/HCC's established experience in managing grant programs, its ability to utilize existing infrastructure to minimize costs, its proposal's potential for broad national outreach in research, and its commitment to allocate funds for research on diseases treated with Lupron beyond prostate cancer. An oversight plan requiring DF/HCC to submit regular financial reports was also implemented. The first installment was ordered for disbursement on November 16, 2010, with no stay requested by the Samsell plaintiffs. On December 16, 2010, Valerie Samsell and Audrey Rohn filed a Notice of Appeal regarding the November order, later amended to include Barbara Sensing. Procedural objections arose, primarily from appellee William Porter, who contended the appeals were untimely as they were not filed within 30 days of the August 6 order, deemed final. DF/HCC countered that Rohn and Samsell’s appeals were timely from the November 16 disbursement order, while Sensing’s was not. The court clarified that the August 6 order was the relevant appealable order, and the November 16 order was merely ministerial and not final. Thus, a notice of appeal must be filed within 30 days of a final judgment or order as defined by civil procedure rules.

An order not set forth on a separate document is not deemed 'entered' and remains non-appealable until 150 days after its entry in the civil docket. The August 6, 2010 order was included within a memorandum and therefore failed the 'separate document' requirement, rendering it unentered until January 3, 2011. The 30-day appeal window expired on February 2, 2011, and since all appellants filed their appeals before this date, they are considered timely. 

Appellees contend that the Samsell plaintiffs lack standing as unnamed, nonparty class members who accepted full payment without objecting to the settlement. The Supreme Court strictly enforces that only parties to a civil action can appeal final judgments, with limited exceptions for those who intervene in district court or for unnamed class members who object to settlements. Valerie Samsell has standing to appeal due to her intervention in the trial court, while the standing of Audrey Rohn and Barbara Sensing is unclear since they did not intervene or object to the settlement. However, both appeared to have raised concerns about the court’s cy pres distribution of unclaimed funds.

The question of whether the Devlin exception for unnamed class members extends to objections regarding cy pres distributions need not be resolved, as Rohn's and Sensing's interests are adequately represented by Samsell, who has standing. 

In class action settlements, unclaimed funds may remain after distributions due to various reasons such as unlocatable class members or declined claims. Courts utilize the equitable doctrine of cy pres, which allows unclaimed funds to be redirected toward a purpose closely related to the plaintiffs' injuries, rather than distributing them individually when impractical.

Settlement agreements can establish cy pres funds for distributing unclaimed residual funds, as recognized in In re Pharmaceutical Industry Average Wholesale Price Litigation. The court affirmed a cy pres fund approval, noting it was part of an arm’s-length negotiated settlement, not mandated by the court, and intended to benefit absent and non-claimant class members. The court rejected claims that all unclaimed residuals must go to claimants, emphasizing that the settlement met the American Law Institute's standard of '100 percent recovery' for class members prior to cy pres distribution. 

The case involved an agreement with similar characteristics, and the court's review of a district court's settlement approval follows an abuse of discretion standard, which is deferential to the trial judge. While material legal errors qualify as abuses, significant lapses in judgment must be demonstrated for a finding of abuse. The Samsell plaintiffs, having entered an implementation agreement that waived their right to appeal and accepted a 167% increase in damages, could not contest the settlement agreement, which anticipated unclaimed funds and provided the district court discretion for cy pres distributions to charitable organizations.

The district court's decision to award unclaimed settlement proceeds to DF/HCC was scrutinized under evolving cy pres distribution law. Despite efforts to implement a supplemental claims process using Medicare data, the district court concluded it would be too costly and time-consuming, especially since only 11,000 of potentially hundreds of thousands of class members had filed claims, making significant recruitment of new claimants unlikely due to a high mortality rate in the class.

The Samsell plaintiffs have withdrawn their appeal regarding the district court's decision to implement a cy pres distribution instead of attempting to recruit more claims from absent class members. The court deemed the administrative burden of direct notice mailing to outweigh the minimal potential for increased claims. The plaintiffs present several arguments: 

1. They assert entitlement to larger distributions over those benefiting absent class members since they have not received treble damages.
2. They claim the distribution process was flawed, including a call for the presiding judge's recusal.
3. They contest awards to DF/HCC on two grounds: a) its doctors cannot receive awards per the agreement, and b) the cy pres principles are violated, as DF/HCC is based in Massachusetts and focuses on prostate cancer, which does not align with the interests of absent national class members.

Many of these claims are factually inaccurate. The principles from the American Law Institute (ALI) regarding cy pres distributions do not support a finding of abuse of discretion. The ALI Principles advocate for redistributing unclaimed funds to ensure class members recover their full losses, particularly where past settlements have not achieved complete compensation. Additionally, the ALI Principles oppose returning unclaimed funds to defendants, as it would undermine the deterrent purpose of class actions. The guidelines establish a preference for recipients whose interests align with those of the class, and if none are identified, a court may approve other recipients after thorough evaluation. Factors for determining reasonable approximation include the aims of the violated statutes, the nature of class injuries, class member characteristics and interests, geographical scope, reasons for unclaimed funds, and the fit between the class and the cy pres recipient.

Failure to satisfy the reasonable approximation test may result in reversal of lower court decisions. In *In re Airline Ticket Commission Antitrust Litigation*, the Eighth Circuit invalidated a cy pres distribution of unclaimed funds to Minnesota law schools and charities, determining that the appropriate recipients should have been the travel agencies affected by unlawful commission caps. The district court's subsequent order to distribute funds to support public interest law was also reversed, as it did not align with the test. 

The Samsell plaintiffs contended that residual funds should first be allocated to reimburse claimants for their full out-of-pocket expenses. However, the court clarified that the measure of damages was not the total price paid for Lupron but rather the amount exceeding the drug's market value due to overpricing. The district court estimated that 30% of the price represented reasonable damages, while the implemented agreement awarded 50%, effectively providing 167% of the plaintiffs' damages. 

The plaintiffs argued that the court abused its discretion by opting for a cy pres distribution instead of awarding treble damages to the claimants. However, it was determined that the 11,000 claimants had already received enhanced compensation. The court deemed that the consumer fund, established for all Lupron purchasers, warranted cy pres distribution to benefit absent class members, which could lead to broader advantages such as lower drug prices or new treatments. 

The settlement agreement's tax provisions anticipated the use of unclaimed funds for charitable purposes benefiting silent class members. The court emphasized that claimants should not receive excess compensation at the expense of absent members, and precedent supports the view that protesting claimants are not entitled to windfalls over cy pres distributions. Furthermore, the Fifth Circuit indicated that additional distributions to class members should be made only if they do not result in windfalls for those already fully compensated.

Distribution of residual funds to claimants who have already been compensated is criticized as creating undeserved windfalls, potentially incentivizing plaintiffs to pursue class actions with large unclaimed damages. This concern is supported by legal scholars and case law, indicating that such distributions could lead to perverse incentives for victims and may encourage the withholding of information from absent class members. The Samsell plaintiffs contest that DF/HCC is an improper recipient of cy pres funds, alleging it profited from the fraudulent scheme, but this assertion lacks evidentiary support as DF/HCC is a not-for-profit organization and not a defendant in the case. Furthermore, the claims against doctors were dismissed, and there is no evidence linking DF/HCC personnel to the alleged fraud. The plaintiffs also criticize the cy pres selection process, particularly questioning the recipient's geographic relevance. However, the court noted that the crucial factor is the potential for the funded projects to benefit the national class, which DF/HCC's global research initiatives aim to achieve. DF/HCC's proposal includes a venture capital model to support high-impact research and is overseen by a board of national leaders in prostate cancer research, with the intent to address a range of health issues beyond prostate cancer. The plaintiffs had previously recommended allocating half of the cy pres funds to DF/HCC due to its commitment to researching various related medical conditions.

The Samsell plaintiffs contend that the district court judge should have recused himself from the cy pres distribution process due to his role as an uncompensated trustee of Vincent Memorial Hospital, which is affiliated with Massachusetts General Hospital (MGH), Brigham Women’s Hospital, and Harvard Medical School, all of which are part of DF/HCC. However, the court finds this recusal claim unmeritorious, stating that recusal is only warranted if a judge's impartiality can reasonably be questioned. The plaintiffs' failure to raise the recusal issue until appeal constitutes a waiver of the claim, as litigants must act upon learning of disqualification grounds rather than waiting for a ruling. The judge disclosed his affiliation during a hearing attended by the plaintiffs, who did not object at that time. Furthermore, the plaintiffs acknowledged the judge's board membership when recommending fund distribution to DF/HCC, thus reinforcing the waiver. The plaintiffs also objected to the appointment of Dr. Jonathan L. Tilly to oversee DF/HCC's use of cy pres funds, citing his connections to the judge and MGH. This objection is also dismissed on similar grounds. Additionally, the plaintiffs argue that the selection process was compromised due to class counsel's representation of a proposed recipient, Community Catalyst/PAL, which was not ultimately selected, rendering this argument irrelevant.

DF/HCC was not among the candidates selected by class counsel, who objected to its consideration. The court found no abuse of discretion in the selection process of cy pres fund recipients. Although the process was commendable, concerns were raised regarding district courts' discretion in distributing cy pres funds, echoing the ALI Principles which recommend that parties identify recipients aligned with the class's interests. The court attempted to mitigate the parties' failure to designate recipients by soliciting proposals and involving them in selection, but it was suggested that the parties should have initially made these decisions. A significant amount of residual funds ($11.4 million out of $40 million) remained, and while imperfections in fund distribution methods exist, the adversarial process is deemed more suitable for such decisions than judicial discretion. Judges typically lack the qualifications and resources to act as charitable foundations, which could lead to perceptions of impropriety. Despite these concerns, the court affirmed the cy pres distribution with a requirement for DF/HCC to undergo an annual audit at its expense, alongside regular accountings to the court.

The cy pres fund distribution aims to be financially sound and align with class interests, with auditing responsibilities not resting on the district court. The November 16, 2010 order indicates an audit requirement was intended to be part of the August 6, 2010 order. TAP, a joint venture of Abbott Laboratories and Takeda Pharmaceutical Company, does not raise Article III jurisdiction issues. The Samsell plaintiffs hold a sufficient interest in residual funds to establish a "case or controversy," satisfying constitutional requirements of injury, causation, and redressability. The key issue is whether the Samsell plaintiffs qualify as "parties" for appealing the cy pres distribution. Appellees argue Valerie Samsell's intervenor status has expired, although the court treated her as an intervenor post-settlement approval. The district court acknowledged her intervenor status during the cy pres selection process. Plaintiffs seeking treble damages had the option to opt out of the settlement, with some pursuing individual claims in state court. The cy pres fund's primary purpose is not to ensure substantial attorney’s fees or make class actions worthwhile, as noted by critics. According to ALI Principles, remaining funds after individual distributions should presumptively be redistributed to participating class members, barring specific limitations. The cy pres doctrine is based on the premise that a settlor would prefer minor adjustments to a trust rather than having funds revert to their residuary legatees.

In the class action context, the cy pres remedy is aimed at preventing the defendant from escaping liability due to the impracticality of directly distributing settlement proceeds to class members. It is emphasized that there should be some benefit, albeit indirect, to the class from the cy pres fund. Abandoning the concept of "next best" relief could raise constitutional concerns. The plaintiffs argued at oral argument that cy pres funds should be allocated to entities combating consumer fraud, but this argument was deemed waived and ultimately rejected. The court noted that statutes like RICO were designed to protect vulnerable consumers, and the cy pres distribution in this case aims to benefit uncompensated class members, distinguishing it from cases involving fluid recovery where funds are directed to future impacted individuals. The court referenced *Klier v. Elf Atochem North America, Inc.*, where a cy pres fund was reversed due to a lack of support in the settlement documents, contrasting it with the current case where such support exists. Additionally, Dennis Rohn requested a portion of the cy pres funds for claimant consumers, while Barbara Sensing was not involved in the selection process. The judge disclosed a potential conflict of interest due to his affiliation with Vincent Memorial Hospital and Mass. General Hospital, clarifying that he does not receive compensation and would not favor any specific group because of his involvement.