Evelyn Pringle September 15, 2006
According to Merck’s August 7, 2006, SEC filing, “At this time, the Company believes that its insurance coverage with respect to the Vioxx Lawsuits will not be adequate to cover its defense costs and any losses.”
In addition, Merck says it has not established any reserves for potential liability relating to the Vioxx lawsuits or investigations, including for those cases in which a verdict has been entered against the company, and are now in post-verdict proceedings or on appeal.
According to the filing, Merck has product liability insurance for claims brought in the Vioxx Product Liability Lawsuits with upper limits of about $630 million after deductibles and co-insurance. This insurance provides coverage for legal defense costs and potential damage amounts that have been or will be incurred in connection with the Vioxx Product Liability Lawsuits.
The company says it has Directors and Officers insurance coverage applicable to the Vioxx Securities Lawsuits and Vioxx Derivative Lawsuits with stated upper limits of about $190 million and fiduciary and other insurance for the Vioxx ERISA Lawsuits with stated upper limits of approximately $275 million.
However, the filing states, the amounts actually recovered under the policies may be less than the amounts specified. It seem there are now disputes with certain insurers about the availability of some or all of this coverage and there are likely to be more disputes, according to Merck.
In fact, the company’s upper level excess insurers, which provide excess insurance potentially applicable to all Vioxx lawsuits, have commenced an arbitration seeking to cancel those policies, to void all obligations under those policies, and to raise other coverage issues with respect to Vioxx lawsuits.
But not to worry. “Merck intends to contest vigorously the insurers’ claims and will attempt to enforce its rights under applicable insurance policies,” the filings says.
For its part, as of December 31, 2004, Merck had established a reserve of $675 million solely for its future legal defense costs related to Vioxx. During 2005, according to the SEC filing, the company spent $285 million in legal defense costs related to Vioxx (i) Product Liability Lawsuits, (ii) Shareholder Lawsuits, (iii) Foreign Lawsuits, and (iv) Investigations.
In the fourth quarter of 2005, Merck recorded a charge of $295 million to increase the reserve for Vioxx legal defense costs to $685 million at December 31, 2005.
“Unfavorable outcomes in the Vioxx Litigation,” the SEC filing concludes, “could have a material adverse effect on the Company’s financial position, liquidity and results of operations.”
Being insurers are fighting against payment of damages before even one case is settled, it does not take a financial genius to figure out that Merck is in for big trouble.
According to the SEC filing, as of June 30, 2006, Merck has been served or is aware that it has been named as a defendant in approximately 14,200 lawsuits, which include approximately 27,100 plaintiff groups, alleging personal injuries resulting from the use of Vioxx.
Of these cases, Merck says, approximately 5,700 lawsuits representing approximately 16,100 plaintiff groups are or are slated to be in the federal Multidistrict Litigation (MDL), and approximately 7,100 lawsuit representing approximately 7,100 plaintiff groups are included in a coordinated proceeding in New Jersey Superior Court before Judge Carol Higbee.
These lawsuits include allegations related to cardiovascular events, thrombotic events, gastrointestinal bleeding or kidney damage.
Merck has also been named as a defendant in close to 200 putative class actions alleging personal injuries or seeking (1) medical monitoring due to class members’ use of Vioxx , (2) disgorgement of profits under unjust enrichment theories, and (3) remedies under state consumer fraud and fair business practice statutes, including recovery for the cost of Vioxx purchased by individuals and third-party payors such as union health plans.
The lawsuits filed in the state courts of New Jersey, California, Texas, and Pennsylvania, have all been transferred to a single judge in each state for coordinated proceedings.
On February 16, 2005, the Judicial Panel on Multidistrict Litigation transferred all Vioxx Product Liability Lawsuits in federal courts nationwide into one MDL for coordinated pre-trial proceedings in the US District Court for the Eastern District of Louisiana before Judge Eldon Fallon.
Judge Fallon has informed the litigants that he intends to try a series of cases through 2006, in the following Vioxx categories: (1) heart attack with short term use; (2) heart attack with long term use; (3) stroke; and (4) cardiovascular injury after April 2002 when the labeling on Vioxx was changed to include the results of the VIGOR trial.
Legal experts say Merck took a major hit on July 29, 2005, when a New Jersey state court certified a nationwide class of third-party payors, such as unions and health insurance plans, who paid for Vioxx used by their plan members. The named plaintiff seeks recovery of purchase costs, plus penalties, based on allegations that the class members paid more for Vioxx than they would have had they known the drug’s alleged risks.
Merck appealed the ruling and on March 31, 2006, the New Jersey Superior Court, Appellate Division, affirmed the class certification. The New Jersey Supreme Court recently decided to exercise its discretion to hear the appeal of the appellate court decision.
The trial in this case is currently scheduled to begin in March 2007, and according to Merck, it is not known whether the Supreme Court’s decision will affect the trial date.
Merck has also been named as a defendant in separate lawsuits brought by the Attorneys General of Alaska, Louisiana, Mississippi, Montana, Texas, and Utah, that claim Merck misrepresented the safety of Vioxx and seek reimbursement for (1) the cost of Vioxx purchased or reimbursed by the state; (2) all sums paid by the state for treatment of persons injured by Vioxx; (3) damages under various common law theories; and (4) remedies under various state statutory theories, including state consumer fraud, fair business practices, or Medicaid fraud, including civil penalties.
Even if the insurance carries end up covering the Vioxx cases, critics say how far is one or two billion dollars worth of insurance tops, going to go when there are states like Texas seeking $168 million in damages and additional civil penalties. Texas Attorney General, Greg Abbott, says he can prove total damages in excess of $250 million including treble reimbursement of $56 million, or $168 million, for five years of Vioxx prescriptions purchased in Texas.
In addition to the product liability lawsuits, Merck and various current and former officers and directors are named defendants in various putative class actions and individual lawsuits filed under the federal securities laws, all of which have been transferred to the US District Court for the District of New Jersey before Judge Stanley Chesler for inclusion in a nationwide shareholder MDL.
The plaintiffs request certification of a class of purchasers of Merck stock between May 21,1999 and October 29, 2004, and allege that the defendants made false and misleading statements regarding Vioxx in violation of the Securities Exchange Act of 1934, and seek unspecified compensatory damages and the costs of lawsuit, including attorneys’ fees.
The complaint also asserts a claim against certain defendants relating to their sale of Merck stock and includes allegations that certain defendants made incomplete and misleading statements in a registration statement and certain prospectuses filed in connection with the Merck Stock Investment Plan, a dividend reinvestment plan.
The Merck defendants have filed a motion to dismiss the complaint which was still pending at the time of the SEC filing on August 7, 2006.
On August 15, 2005, a lawsuit was filed in Oregon state court under Oregon securities law, by the State of Oregon on behalf of the Oregon Public Employee Retirement Fund against Merck and certain current and former officers and directors alleging damages in connection with its purchases of Merck common stock at artificially inflated prices due to Merck’s violations of law related to disclosures about Vioxx .
On July 19, 2006, the Court denied a motion by Merck to dismiss Oregon’s complaint and according to Merck’s SEC filing, the current and former officers and directors have entered into a tolling agreement in exchange for plaintiffs’ dismissal, without prejudice, of the claims against them.
Various federal shareholder derivative actions have been transferred to the Shareholder MDL and consolidated for all purposes by Judge Chesler. The consolidated complaint arises out of the same factual allegations that are made in the other Vioxx securities lawsuits.
The derivative suits assert claims against certain members of the Board past and present, and certain executive officers, for breach of fiduciary duty, waste of corporate assets, unjust enrichment, abuse of control and gross mismanagement.
On May 5, 2006, Judge Chesler granted a motion by defendants to dismiss the complaint and denied plaintiffs’ request for leave to amend their complaint, and plaintiffs have appealed to the US Court of Appeals for the Third Circuit.
On October 29, 2004, according to the SEC filing, two shareholders made a demand on the Board to take legal action against former Chairman, President and CEO, Raymond Gilmartin, and other individuals for causing damage to the company with respect to the improper marketing of Vioxx .
In response to the shareholder’s demand letter, the Board determined at its November 23, 2004 meeting that the Board would take the request under consideration and it remains under consideration.
The Board, the SEC filing states, has recently received another shareholder letter demanding that the Board take legal action against the Board and Merck management for causing damage to the company relating to the company’s improper marketing of Vioxx.
In addition, various federal putative class actions filed against Merck and certain current and former officers and directors have been transferred to the Shareholder MDL and consolidated for all purposes. The consolidated complaint asserts claims on behalf of certain current and former employees who are participants in Merck’s retirement plans for breach of fiduciary duty under the Employee Retirement Income Security Act.
The allegations are similar to those contained in the other securities lawsuits. On October 7, 2005, defendants moved to dismiss the complaint, and on July 11, 2006, Judge Chesler granted in part and denied in part the motion to dismiss.
The court dismissed the claim of breach of fiduciary duty based on continued investment in Merck stock as to all defendants except the 5 individuals who were members of Merck’s Management Pension Investment Committee during the purported class period.
The court dismissed the claim for breach of fiduciary duty based on failure to provide complete or accurate information to participants to the extent it related to specific communications cited in the complaint, but declined to dismiss the claim before discovery to the extent plaintiffs allege that adverse information was withheld from participants.
The court also dismissed the claim for failure to monitor as to all defendants except the members of the Compensation and Benefits Committee of Merck’s Board of Directors who had supervisory responsibility for the MPIC.
Finally, the court declined to dismiss the claim for co-fiduciary liability, absent factual development, but dismissed as duplicative the claim for knowing participation in breach of fiduciary duty.
As far as a slow down in the continuous stream of lawsuits, Merck is no doubt hoping to see a light at the end of the tunnel soon because Vioxx was pulled off the market on September 30, 2004, and some states have a 2-year statute of limitations requiring that lawsuits must be filed within two years after the plaintiffs learned or could have learned of their potential cause of action.
As a result, experts say September 30, 2006 is a deadline for filing Vioxx cases in many states. However, they also note that the laws governing statutes of limitations are complex, can vary from state to state, and might be affected by pending class actions. For instance, some states have 3-year statutes of limitations, and some even longer.
Legal analysts predict there will be arguments raised about the proper application of these statutes, but say ultimately the decisions will be up to the federal and state judges presiding over the individual cases.
But then Merck attorneys know that September definitely will not be the end date for filing Vioxx lawsuits because according to Merck’s SEC filing, as of June 30, 2006, the company has entered into agreements with about 5,800 plaintiffs to toll the statute of limitations, so the September 30, 2006 cut-off date would not apply in those cases.
The tolling agreement with the MDL Plaintiffs’ Steering Committee establishes a procedure to halt the running of the statute of limitations as to certain categories of claims arising from the use of Vioxx by non-New Jersey citizens.
The agreement applies to individuals who have not yet filed lawsuits and only to those claimants alleging injuries resulting from a thrombotic cardiovascular event that results in a myocardial infarction or ischemic stroke. The agreement requires any tolled claims to be filed in federal court.
And although its never mentioned much, Merck has been named as a defendant in litigation relating to Vioxx all over the globe including several countries in Europe as well as Canada, Australia, Brazil, Turkey, and Israel.
In addition, based on media reports and other sources, Merck says, it anticipates that additional Vioxx Product Liability Lawsuits, Vioxx Shareholder Lawsuits and Vioxx Foreign Lawsuits will be filed against it and certain current and former officers and directors in the future.
And that may be true, because critics says there should be another shareholder lawsuit filed against Merck Management this month for flushing another $21 million in profits down the toilet by paying a committee to publish a bogus 1,700 page report to supposedly absolve Merck Management of any wrongdoing.
But in any event, Merck’s legal woes are not limited to civil court proceedings. In November 2004, Merck was advised by the SEC that it was commencing an informal inquiry concerning Vioxx, and on January 28, 2005, Merck announced that it received notice that the SEC issued a formal notice of investigation.
Also, according to the company’s SEC filing, Merck has received subpoenas from the US Department of Justice requesting information related to the research, marketing and selling activities of Vioxx in a federal health care investigation under criminal statutes.
Merck also says it has received a number of Civil Investigative Demands from a group of Attorneys General from 31 states and the District of Columbia who are investigating whether Merck violated state consumer protection laws when marketing Vioxx.
And finally, to end on a happy note, the SEC filing says, investigations are being conducted by local authorities in certain cities in Europe in order to determine whether any criminal charges should be filed related to Vioxx.
“The Company,” Merck states, “cannot predict the outcome of these inquiries; however, they could result in potential civil and/or criminal dispositions.”