Unsettled

Few industry executives believe the settlement of litigation between independent pharmacists and drug cpompanies itself will change company pricing practices; if anything, the court emphatically affirmed that differential pricing supports, rather than undermines, a competitive marketplace.

The settling of the litigation between independent pharmacists and drug companies doesn't end matters; it creates a new beginning.

by David Cassak

• In rejecting the original proposed settlements between retail pharmacists and drug companies, the court affirmed the need to look at industry pricing practices, but denied the pharmacists' request for return to a one-price system.

• In the process, the court argued that differential pricing supports, rather than undermines, a competitive marketplace and that those customers who can move market share deserve better pricing.

• While few industry executives believe the settlements will end price discounts and drive all prices to a single retail level, the settlements come at a time when drug companies are, in general, reassessing their managed care contracting.

• By shifting the rationale for rebates from status of the purchaser to an ability to move market share, the settlements give an important boost to the current trend among drug companies toward performance-driven contracts with MCOs and PBMs.

It's always a messy affair when business practices and policies are sorted out in courts of law. It's even messier when those practices have to do with an area as sensitive as pricing. Thus, it was with a noticeable chill that drug companies responded to the recent litigation between independent pharmacists and 15 (later 12) leading pharmaceutical companies.

The settlements, which resolved a significant portion of, but didn't completely end the litigation, rejected the pharmacists' call for an end to differential pricing in the retail sector and, in the process, preserved the right of manufacturers to incentivize or reward, through lower prices, those who can increase the market share of their products. But it also opened the door to lower prices for those independent pharmacists who can prove that they, too, are able to affect market share.

The settlements were neither a win nor a loss for either side—by definition, in a settlement, each side gives a little to come to some kind of middle ground. But already, as they try to sort out what impact the settlement will have on current pricing and managed care pricing policies, some industry executives are pointing to potential winners and losers. Perhaps the biggest casualty: the very independent pharmacists whom the suit was trying to protect, who are unlikely ever to be able to match MCOs in their ability to affect which products are sold.

For the ostensible winners—the MCOs who, while not a party to the litigation, nonetheless benefited by seeing preferential pricing upheld—the settlement brings new challenges, as they face increased pressure to prove they can deliver the market share gains they've always claimed. The real winners may actually be pharmaceutical companies who will find customers increasingly forced into accepting performance-driven provisions in their contracts.

Indeed, while the settlement itself breaks no new ground, it comes at a time when many drug companies are seriously rethinking their managed care strategies. Few industry executives believe the settlement itself will change company pricing practices; if anything, the court emphatically affirmed that differential pricing supports, rather than undermines, a competitive marketplace. But by shifting the rationale for rebates from the status per seof the customer to the customer's ability, independent of status to move market share, the settlements give an important boost to the current trend among drug companies toward performance-driven contracts with MCOs and PBMs.

The Suit

The litigation began in October 1993, with a lawsuit, filed in the federal court of the Eastern District of Pennsylvania asRite-Aid Corp. et al. v. American Home Products Corp. et al, brought by retail pharmacists challenging pricing practices in the retail sector under the federal antitrust laws. Other lawsuits raising similar claims started to proliferate across the country and in 1994 all the cases were consolidated as In re: Brand Name Prescription Drugs Antitrust Litigation and assigned to Charles P. Kocoras, a judge in the United States District Court for the Northern District of Illinois in Chicago. (One of the last of Jimmy Carter's appointments to the Federal bench, Kocoras, a former Federal prosecutor, has a reputation as a fair judge and excellent jurist.) The result was, says Judge Kocoras in court papers filed in the settlements, litigation of "enormous magnitude and complexity," and, adds legal experts, almost certainly involving allegations of one of the largest antitrust conspiracies ever.

The original litigation pitted tens of thousands of independent drug retailers against more than twenty drug manufacturers and wholesalers representing some of the largest names in the industry. Eventually, the number of drug firms was reduced to 15 and then further to 12 as two companies, Abbott Laboratories and Ciba-Geigy AG settled independently and Glaxo Inc. and Burroughs Wellcome Inc. merged. In an earlier motion, a number of leading wholesalers, whom the pharmacists charged had participated in and supported the unfair pricing, had been dismissed from the litigation.

The plaintiffs eventually spit into two groups, one, a class of plaintiffs defined by the court as "all persons and entities" in the United States who, at any time from October 15, 1989 to the present, "purchase or purchased prescription brand name drugs from any of the defendants." Excluded from the plaintiffs' class were any independent retailers who voluntarily opted out of the suit in order to pursue individual claims—a group that ultimately came to include "thousands of independent pharmacies, drug stores, and grocery chains," as described by the court in the final settlement decree. (It is standard in class actions to give persons or entities who technically qualify as a member of the class a chance to opt out and not have their fates controlled by the class plaintiff).

In the suit itself, the pharmacists allege a price-fixing conspiracy by the defendants to keep prescription drug prices artificially high, in violation of the Sherman Antitrust and Robinson-Patman Acts. Judge Kocoras, in a recent ruling in the case, noted that the gist of the plaintiffs' Sherman Act claims is that the defendants formed a cartel and acted together to create a dual-pricing system designed to raise or stabilize prices on brand name drugs to retail pharmacies. "To accomplish this goal," the court said in summarizing the plaintiffs' central argument, defendants have, among other practices, "refused to make available to community pharmacies various discounts, rebates and other price-lowering mechanisms that each of the ... defendants [has] made available to ‘institutional' or ‘managed care' buyers."

The drug companies responded to these allegations with two arguments. First, they denied any collusion in setting prices, asserting that pricing decisions to retailers have been, and are, dictated by individual circumstances. Second, and more importantly, they conceded that MCOs often get better prices but defended the discounts on the grounds that MCOs and PBMs have clout that translates into the ability to affect market share, if and when they choose to use it, by influencing prescribing habits through inclusion or exclusion from their formularies. Moreover, they argued, independent pharmacists don't have any such power to influence market share.

The Case (For the Most Part) Settles

Beginning in 1994, the litigation produced extensive discovery, many motions by both sides on a variety of issues, and more than fifty court orders or rulings. By early 1996, discovery was complete and the court had set a date for the trial to begin in May.

By the late winter, the class plaintiffs and fifteen of the defendants1 had reached tentative settlements, however, ending the prospects for the May trial. (Still on the docket for the defendants: all of the claims brought by the individual plaintiffs, including Robinson-Patman Act claims).

The proposed settlements were the establishment of a fund of $408 million to pay any claim for damages suffered by the class plaintiffs; use of 5% of the $408 million to set up and operate a not-for-profit Foundation "to advance the competitive position of retail pharmacies in the brand name prescription drug marketplace;" and a very broad release of all claims that have been or could be asserted by any member of the class against the settling defendants, including Sherman Act claims, claims under Robinson-Patman, and state law claims.

On April 4, 1996, the court rejected the proposed settlements, following a significant amount of criticism from independent pharmacists and their representatives, on the grounds that they contained no provisions addressing the pricing practices of the drug companies and thus would do little to maintain a fair and competitive retail industry. (For more on the objections raised to the original proposed settlements, see sidebar).

The rejection of the settlements wasn't, however, a total victory for the pharmacists, who had argued that the practice of offering discounts is per seillegal under the antitrust laws and should be replaced with a one-price system. Instead, the court affirmed the right of drug companies to engage in differential pricing, but argued that pharmacists should be allowed to receive such pricing, where they've earned it.

In the process, it also affirmed the implicit trade-off of discounts or rebates for market share gains that form the basis of much drug company contracting with MCOs and PBMs. In fact, the court specifically made the point that such pricing practices support, rather than undermine, a competitive marketplace. Said the court, "There is substantial evidence that managed care providers possess considerable influence over the prescribing decisions, and a manufacturer's failure to discount may result in the elimination of its products from the managed care formularies designed to influence that prescribing decision. Accordingly, the manufacturer's discounting decision in these cases is often a response to competitive pressures and reflects the epitome of a competitive system. As a matter of law, there is nothing improper about discounting the costs of pharmaceutical drugs to a purchaser for the purpose of receiving or maintaining that customer's business. And nothing in the law requires the manufacturer to provide a similar discount to a customer without a similar ability to affect market share....

"What many plaintiffs really seek—a one-price policy for themselves and managed care—is not legally attainable in this or any other court. Any injunction or requirement along these lines would discourage competition, not enhance it."

A New Basis for Discounts

Notwithstanding its view that current discount may pricing actually enhance competition, the court wastroubled by the lack of any provision in the settlement agreements addressing future drug company pricing practices or policies The court stated that the evidence seen suggested that the decision to give or deny discounts was more often based on the status of the retailer—i.e., on their role as an independent pharmacist or MCO—and not on a consideration of whether that retailer had the power to affect market share. Indeed, the court suggested, without directly stating it, that pricing decisions based exclusively on status—rather than ability to move market share—might well be a violation of the Sherman Act.

As a result, the court stated that in order to gain approval, the settlements had to include two additional features. First, drug companies had to commit that they would not base the offering of discounts on the "statusof the buying entity"—i.e., independent pharmacy or MCO. Second, they had to agree that any entity in the retail sector—again, whether an independent pharmacy or a managed care facility—who could demonstrate an ability to affect market share would be offered the same types of discounts. Without those features, the court said, the settlements were less than "fair, reasonable and adequate".

The parties subsequently amended the proposed settlements and added language similar, although not identical, to the language suggested in the court's April 4, 1996 opinion on the settlements, language which addressed the status issue. The amendments produced far fewer objections than the first time (only 162) and both the NARD (National Association of Retail Druggists, a pharmacy trade group) and PFF (Pharmacists Freedom Fund), both of whom had strongly opposed the original settlements, were on record as supporting the proposed settlements as amended.

While the court did not endorse the amended settlements enthusiastically, it stated that it believed that the "spirit", in its word, of the revised amendments adequately addressed the concerns raised in the April 4th opinion. Without completely discounting the concerns of those who had raised objections, the court noted that the added language was in the nature of a compromise, not a victory for either side, and that any class member who believed that a given defendant's pricing practices did not live up to the settlement could raise the matter in court, either before Judge Kocoras or in separate litigation. The court also noted that the fact that two of the originally named drug companies had dropped out of the settlements were further evidence that the amendments were not a sham.

Finally, the court rejected a new objection, one that had not been raised before. Under what the court called a "most favored nation" clause, each settling defendant agreed that, subject to certain time limits, if it entered into a settlement with any other plaintiff on monetary terms more favorable than the class members were receiving in the proposed settlements, it had to increase its contribution to the settlement amount to remove the disparity. The court found the provision protected the interests of the class plaintiffs, who had taken the lead in the litigation and was not persuaded that the MFN provision would discourage other future settlements.

No End to Discounting

The principle concern among drug company executives was that the settlements would essentially eradicate the class of trade distinctions that drug companies have used to justify their ability to offer better pricing to MCOs serving the retail marketplace than to independent pharmacies without violating Sherman Antitrust and Robinson-Patman constraints. Indeed, the plaintiffs' case argued that such pricing differences are illegal and should be eliminated—that, in effect, anyone selling drugs in the retail sector should pay the same prices for drugs—an argument the final settlement explicitly rejected.

The suit doesn't eliminate class of trade distinctions, preserving the ability of drug companies to offer different retail customers different prices. But it does turn such distinctions on their head by establishing the criteria by which such price differences can be justified not on the basis of the status of the customer, but by the ability of that customer, regardless of its status, to affect market share.

In short, the settlement allows for class of trade distinctions based not on whether the customer is a pharmacist or MCO and requires drug companies to give the same discounts to anyone who can essentially do the same thing as MCOs. Says one industry official, "The judge basically said that you can give price discounts to MCOs but you have to give similar price discounts to anyone else who can do the same thing. I think we're going to see some interesting discussions about what it means to do the same thing."

The irony is, of course, that drug companies themselves would love to see class of trade distinctions go away, and the industry revert back to a time of one-price policies for all customers. During the various pricing debates over the last several years—the first wave of managed care and hospital buying group contracting, for example, or the passage of the Medicaid rebate (Pryor) legislation—many drug company legal departments worried about the legality of offering different levels of pricing. In fact, during the debates over the Pryor legislation, some drug industry executives argued that the law, which mandated that companies give Medicaid either the same price discounts it offered to other large customers or a pre-established discount, whichever netted Medicaid a better deal—would force all drug industry prices to new highs.

That never really happened, nor is it likely to in the wake of the disposition of the independent pharmacists' law suit. Most drug companies today recognize the reality ushered in by the advent of managed care and large aggregated purchasers and the strategic and tactical importance of aggressive pricing strategies. Thus, the early evidence suggests that whatever concerns may have been raised, the settlements have done little or nothing to change drug company pricing practices to managed care customers.

"I really haven't seen any significant difference in the way manufacturers have approached us," either before or since the settlement, notes John Voris, EVP Strategic Alliances at PCS Health Systems Inc., a division of Eli Lilly & Co. and a leading pharmacy benefit management (PBM) company. Adds another PBM executive, "Of the 40 or so drug companies we do business with, only one or two have either tried to project a sense of concern [over the settlements] or have verbalized concern as one of the reasons that they've backed off price discounts."

Some industry executives argue that the settlement could redirect attention toward the drug company/PBM acquisitions of a couple of years ago. If the goal of the suit is to make the playing field more level, says one industry executive, "People are going to start asking how it is that if you're Merck, SmithKline, or Lilly, you can now raise prices and still get on formulary."

Interestingly, the assumptions implicit in the plaintiffs' case deny, in some respects, current market reality about drug pricing. The plaintiffs' case rested on the premise that drug company pricing policies are consistent and intentional across the country and across classes of trade. In fact, arguably the biggest potential problem raised by the settlements may be getting a handle on outlier price rebates/discounts, either isolated instances of rebates/discounts that are unusually deep relative to the rebates/discounts offered other, larger customers or discounts that are offered to customers who really don't warrant them.

Industry executives note that most drug companies have two kinds of rebate or discount pricing structures—those offered to their large MCO and PBM clients, formulated after a careful and close analysis of the likely impact of the rebate, and those offered to others that are less closely planned and often less well acknowledged. "The dirty secret of a lot of drug companies is that they often have crazy price discounts in isolated pockets around the country," says one industry executive. "I know some companies where a sales rep has given a discount to a very small pharmacy chain that is better than the price large PBMs get."

Still, such practices, while embarrassing, are hardly an indication of company strategy or policy and notper se illegal. Nor are they anything new. Following the passage of the Pryor legislation, many drug companies were forced to go back and look closely for the first time at their pricing across the country. What they found was that in selected cases, a small MCO or hospital had significant better pricing than anyone else, purely the result of an overeager contract department that had made what it believed was a one-time play for a chunk of business.

In the past, most drug companies paid little attention to such outliers. But under the Pryor law, such discounts became an issue because the "most favored nations" clause in the law theoretically required the drug company to offer Medicaid the lower of a pre-set discount or the best price it offered to any other customer in the marketplace. And some industry executives believe the same issue may be raised by the settlement.

A Move Toward Performance-Based Contracts

One PBM executive, acknowledging he was sometimes frustrated by these kinds of pricing inconsistencies, concedes, "A lot of times, the top guys at the company don't even know this [kind of pricing] goes on, because it's so haphazard and isolated." A closer scrutiny of pricing practices, which the settlement could lead to, may uncover more of these outliers, forcing them to adjust pricing in selected markets. But, this executive goes on, "It's small potatoes—no big deal and certainly not part of a broader pattern."

Rather, the sensitivity surrounding the settlement stems not from the fact that the settlement itself establishes any new pricing mechanism or legal ground for pricing, but that it comes at a time when drug companies have begun to express a greater concern about the value of managed care contracting. In particular, the implicit argument made by the settlement—that independent pharmacies should qualify for the same discounts that MCOs earn if they can prove they can do the same things for drug companies—begs the question on every drug company's lips: what, exactly, are MCOs and PBMs doing for us? (See "The Next Generation of Rx Benefit Management,"IN VIVO, July/August 1995.)

While some drug industry executives have argued that the settlement could seriously restrict discounting, leading more and more companies to push drug prices closer to a common, retail level, many more believe that any movement upward in prices will be opportunistic plays to shore up pricing in general. Says one managed care executive, "Drug companies look for any excuse to raise their prices. And they may take this as one." Acknowledging that he is seeing prices go up, though only slightly, he asks, "Is that a result of the July settlement? It's hard to say; it may be just a coincidence."

More common is the sentiment that if anything forces drug company pricing to a higher level, it will be the broader failure of MCOs and PBMs to deliver convincing proof of their ability to move market share. Over the last year or so, many drug companies have grown skeptical that the price concessions they made several years ago delivered any significant new business. Moreover, recent shifts in the MCO industry, most notably a movement away from closed formularies, have left many drug industry executives concerned that they may never see significant share movement.

In fact, some drug company executives argue that their willingness to contract won't be changed by the settlements, but that where they are contracting, they're demanding more performance-based contracting. At a recent symposium on managed care, an executive from Cigna Corp. said that, as a result of the lawsuit, her organization would no longer tie rebates to specific market share gains. Instead, rebates would become the cost of doing business for access to Cigna's closed formularies.

As quoted in The Pink Sheet, Cigna's Assistant VP of Pharmaceutical Contracting, Cynthia Pigg, said she didn't like contacts predicated on market share shifts because Cigna's formularies are already closed. "When you enter a relationship with an MCO [whose] formularies are closed, market share is really irrelevant," she argued. "A place on that formulary really affords you an opportunity." Pigg said she is sympathetic to manufacturers' desire to increase business, but she went on, "I just don't want the specific contract...to say, ‘0-15% I get this discount, 15-20% I get this discount.' If you get on our formulary you are assured success." In return, Cigna expects "maximum discounts for your status on formulary."

But it is precisely this rebate-for-access tradeoff that pharmaceutical companies are trying to get away from, as they begin to insist that rebates be tied to specific performance goals. In fact, such tradeoffs may be exactly the kind of status-based discrimination that the court found troubling in the settlements. In any event, says one drug company executive about the Cigna suggestion, "That's ridiculous. They can call it whatever they want. There's no way we're going to continue to pay rebates unless we can get some very specific and measurable market share gains. We're tired of simply paying to be on formulary."

Other drug company managed care executives agree. Says one, "In the past, if you had a vulnerable product line, you tended to contract for defensive reasons, simply to ensure access. I think we're moving toward performance contracting which says that if the customer wants to get rebates, they have to move market share."

Indeed, most PBM executives acknowledge that they are feeling greater and greater pressure today to prove they can move market share, a pressure the lawsuit will only intensify. Says PCS' John Voris, "Manufacturers are demanding that we [i.e., PBMs] get money the old fashioned way—we earn it. There's been more scrutiny since I've been here over the movement of market share in contracts." Drug companies are more than willing to continue to contract, he goes on "but only if, in fact, they benefit."

As a result, many PBMs, including PCS, have spent much of the last year on pilot programs designed to demonstrate that they can actually move market share in the retail sector. (Moving share in the mail order market doesn't really count because the fact that the PBM actually dispenses the drug makes it much easier to influence which product is used).

PCS recently launched its Performance Rxprogram, a retail therapeutic interchange program. John Voris notes that over the last six months, PCS has been "very encouraged" both by the results of the Performance Rx program and by interest shown by PCS clients and health plans.

Working with retail pharmacists—PCS now has some 38,000 signed up and connected through computer linkages around the country—PCS markets the program to payers and health plans as a strategy of lowering overall drug costs by substituting preferred drugs for non-preferred where patients, individually and voluntarily, agree to such substitutions.

Under the program, when a patient comes into a pharmacist with a prescription for a product that is not on PCS' preferred list, the pharmacist is alerted through a computer program. The patient is then given the option of accepting the preferred product or staying with the prescription as written. If the patient agrees to the substitution, the pharmacist contacts the patient's physician who also must approve the substitution. If he or she gives the okay, the pharmacist changes the prescription.

PCS has seen significant movement in market share. Interestingly, patients are often more reluctant to switch than physicians; sometimes they see no savings from the substitution or don't want to have to go home and come back as the pharmacist takes time to contact their physician. Thus, physicians tend to agree to the substitution around 60% of the time—though John Voris notes that it varies depending on the therapeutic category—while patients are willing to go along somewhat less often.

Pharmacists as PBMs?

Voris argues that the debate about rebates and individual product prices misses a larger point. "We really feel the focus should be on the overall drug costs, the per member per month drug spend, not just the rebates," he says. "When we sell Performance Rxto our customers, we're doing so on the premise that we're going to lower overall drug costs, not deliver a certain rebate."

Programs like Performance Rxare encouraging for PBM officials and, theoretically, manufacturers who want some assurances that the rebates they are offering will actually generate new business. Still, programs which generate hard evidence of market share shifts, are rare. One issue implicit in the law suit and settlements but not specifically addressed: what's the burden of proof for moving market share? Having preserved the ability to offer price discounts, does the suit make a distinction between the promise, or reasonable assurance of a MCO's (or pharmacist's, for that matter) ability to move market share and the actual proof?

For drug companies, the question is whether the settlements create a higher burden of proof than they've used in the past by making them prove that customers have earned price discounts. Attorneys for both the plaintiffs and defendants refused requests for interviews for this article. But legal experts say that recent Supreme Court decisions around price discounts are clear in suggesting that companies need only have a "reasonable probability," not a dead certainty that such share gains will happen.

Some industry executives argue that the settlements make mutually exclusive two values one or both of the parties had hoped to preserve: the competitive viability of the independent pharmacists, on the one hand, and, on the other, the value of price rebates and discounts as a tool in reducing drug costs. Preserving the competitive viability of the pharmacists, the argument goes, can only be done by eliminating the kinds of discounting to other players, such as MCOs, that was the original impetus of the suit. Similarly, preserving price rebates/discounts can only be done by the kind of discriminatory pricing that puts groups like independent pharmacists in a disadvantageous position.

Indeed, some industry executives believe the irony of the suit is that it threatens the one group it was intended to preserve: independent pharmacists. Says one drug company executive, "The big loser in this is the independent pharmacists because at the end of the day, they'll never be able to prove that they deserve the kinds of discounts [MCOs] get."

In particular, the prospect that independent pharmacists will become, in effect, pharmacy benefit managers is unimaginable to some industry insiders. "Let them try," says one PBM executive. "We welcome the competition. What they don't realize is how tough this business is right now." With competition intensifying and the market shrinking, the vast majority of the gains made by established PBM players come at the expense of other competitors, rather than mining new accounts. "They'll get their name in the paper for one or two local accounts," this executive goes on, "but when it comes to launching a full-fledged PBM business, they're kidding themselves—especially when their first act as PBM is to raise the dispensing fee," a major opportunity for savings by PBMs, much greater than rebates.

Most industry executives believe that the large market share leaders, such as Medco, PCS, and DPS, will simply be too formidable for independent pharmacists to compete against. Says one industry executive, "The leading PBMs are too strong, too entrenched. They'll cut the new PBMs off at the knees. It'll take forever for these guys to get a foothold, and when they do, the drug companies will give them a 1% discount and they'll go away happy."

The Jury's Still Out

For now, few believe the settlements will significantly upset drug company pricing or contracting practices, outside of furthering company interest in performance-based contracts. The truth is, the very discounts the independent pharmacists alleged were so damaging to their competitive viability are the best proof that the drug industry is far from the cartel the same pharmacists alleged in the suit.

Competitive pressures and ever-crowded therapeutic categories long ago destroyed any semblance of a cartel implicit in the one-price policy that once held sway in many drug companies. (Indeed, ironically, the plaintiffs argued both that the drug industry has created a cartel and that a return to a one-price policy is the best way to break that cartel). If the drug industry didn't band together to raise prices in the face of the advent of MCOs and PBMs in the first place, or the Pryor legislation in the second, it's unlikely to do so in response to the independent pharmacists. Says one drug company executive, "What we do with MCOs now will happen irrespective of the retail lawsuit."

That's not to say the settlements might not have some longer term impact, if only because they're forcing drug companies to take a closer look at things like pricing practices and policies. Says PCS' John Voris, "Certainly the issue around the settlement of this law suit is a significant issue. I think the jury is still out on who benefits and who loses—manufacturer or independent pharmacy, chain pharmacy or our customer. Everyone is out talking to everyone trying to sort things out."

MCOs and PBMs themselves are also concerned about possible implications of the settlements. Rising drug costs are beginning to be perceived as a problem industry-wide. Says one MCO executive, "A lot of people are beginning to blame drug costs for some [MCO's] poor financial performance."

More to the point, John Voris argues that the rebate and pricing issues raised by the settlement have to be seen in a larger context. "Our biggest concern is the value that flows to our customers, who are the payers." No matter who wins in the settlement, any disruption of a process that over the last several years has successfully helped to lower drug costs becomes a problem. "For us at PCS, the majority of the value in rebates flows back to our customers," he goes on. "Anything that gets in the way of that or puts it at risk raises concerns. Our focus is on lowering overall drug costs. Rebates themselves are only a part of that."

I Object

Under the rules governing class actions, the original settlements had to be approved by the court, in order to ensure that the interests of those who opted to join the class and allow the class plaintiffs to represent their interests were protected. By an order dated February 15, 1996, the court tentatively approved the settlements but required the class plaintiffs to give notice of the settlements to all members of the class and allow those class members and any other interested parties an opportunity to object. The court invited written objections and held a "fairness" hearing in late March.

According to the class plaintiffs, more than 3,300 such objections were received, critical of the settlements. In documents to the court, the plaintiffs suggested that most of the criticism seemed to be "boilerplate" in a form concocted by the National Association of Retail Druggists (NARD) and the Pharmacy Freedom Fund (PFF). Ultimately, the court did accept one type of objection—namely that the settlement didn't do anything to affect drug company pricing practices—as ground for overturning the original settlements. But in the process, it rejected a number of other criticisms made by independent pharmacists and their representatives.

For example, the court rejected the argument that the amount of cash called for by the settlements—$408 million—was too low. Objectors argued that the damages suffered by the plaintiffs, by the plaintiffs' own estimates, was $6 billion before trebling (which is required under antitrust law) and rose to as much as $23-32 billion before trebling if you added the Robinson-Patman claims asserted by the non-class plaintiffs.

The court, however, considered the amount offered in the settlements to be large—five times larger than any previous award in an antitrust class action not preceded by a governmental investigation. (The court may also have reasoned that the amount was sufficient because, since the commencement of the litigation, the FTC had announced that it had begun an investigation into drug industry pricing, targeting 22 companies for investigation, most of whom were named in the suit).

The court further reasoned that the likelihood of a multi-billion dollar damage award, either from the jury or following an appeal, was "far from certain". While acknowledging that the settlement was significantly less than the amount of damages claimed by the plaintiffs, it still characterized the amount as "sufficiently large to warrant attention." The court also rejected an objection that the proposed settlements did not contain specifics on how the settlement amount was to be allocated to members of the class, but instead left that to be worked out later.

The court was also not persuaded by criticisms that the Foundation that was to be established—which would not be authorized to engage in litigation or lobbying activities—was worthless. The court said that the Foundation would serve the class members by other activities, such as monitoring pricing practices, all geared to improving market share in the retail drug industry.

Finally, the court rejected objections to the broad scope of the release given to the settling defendants, primarily on the grounds that broad releases (for claims that both were asserted and thatcould have been asserted) are both an ordinary feature of settlements and vital to making the settlement worthwhile to the settling defendants. Nor did the court believe that class members had to be given a second opportunity to opt out of the class given the terms of the proposed settlements.Warner-Lambert Company, Zeneca Inc., Abbott Laboratories and Ciba-Geigy Corporation.