Peering Through the Merck

Deconstructing the strategy choices facing the Vioxx litigants.

On August 19, Merck, the giant pharmaceutical manufacturer, got smacked. In Ernst v. Merck Co., Carol Ernst sued Merck on the grounds that its pain medication, Vioxx, killed her husband, Robert. Merck denied that Vioxx was the cause of Ernst’s death. But after locking horns on the case before a jury of 12 Texans, Merck came away bloodied to the tune of $253.4 million. The verdict will almost surely be dramatically reduced, since punitive damages in Texas are capped. Still, the award will likely go up on appeal to around $26 million. For Merck, with net revenues of about $6 billion a year, that news might have been bad, but palatable. But, due to the long, long line of plaintiffs champing at the bit to sue them, the Texas verdict actually means just one down, thousands to go. So what’s a Fortune 100 company to do?

Over the coming months, Merck and the lawyers representing Vioxx plaintiffs will have a series of crossing-the-Rubicon decisions to make in this litigation: Each side will have to choose between expensive piecemeal litigation, expensive class-action litigation, expensive settlement, or expensive bankruptcy. And they’ll make those choices with precious little information, while their costs spiral upward. So here’s a little backgrounder on the calculus behind Merck’s and Vioxx plaintiffs’ fight-or-flight decision-making.

Merck has so far insisted that it is not going to settle the Vioxx cases. Rather, it intends to try them one at a time, steadily vindicating its position, clearing its good name, and ultimately persuading the plaintiffs’ bar that tangling with Big Pharma, this time, was economically ill-advised. As strategies go, that makes pretty good sense, if they think they can consistently win each of these lawsuits, and especially given the reality of how mass tort cases get litigated and negotiated. While there are thousands of possible Vioxx claimants out there (Merck spent lots of money advertising the drug and sold lots of it, after all), the real threat to the company is actually only posed by a relatively small number of sophisticated, well-financed plaintiffs’ law firms.

If you’ve seen law-firm advertisements on local TV, madly seeking Vioxx clients, you should understand that the local attorneys advertising for that work will very likely do almost none of it. In a series of referral agreements, many of the smaller firms that sign up Vioxx clients will agree to aggregate those cases under the umbrella of larger firms. That estimate of “thousands” of lawsuits, while daunting and real, is therefore a bit of an illusion. If those plaintiffs’ firms with large inventories of clients can be persuaded, by a pattern of Merck consistently winning Vioxx trials, to quit the field, Merck can significantly cut its exposure without having to try each of those thousands of lawsuits.

In fairness to the firms representing Vioxx claimants, these referral agreements do help plaintiffs take advantage of the big firms’ experience in Vioxx cases. The larger purpose behind the aggregation, though, is the same purpose behind a co-op of any sort: creating market leverage. The firms at the head of these referral chains will, with hundreds or even thousands of cases aggregated, seek some sort of “inventory” settlement with Merck. The plaintiff and defense lawyers in this negotiation will engage in lengthy discussions over the number of claimants included in the inventory, the nature of their illnesses, and the approximate value, if tried, of the whole lot.

Given the plaintiff firms’ incentive to settle en masse, the question then becomes why Merck, or any defendant, when confronted with an inventory of such claims, should not pick and choose which to settle. The answer is, they’ll try to do just that. Indeed, early indications in the wake of the Ernst verdict are that Merck may have already begun this shift in strategy—litigating some cases and settling others.

The plaintiffs’ firms will try to hold out for a large-scale settlement because they won’t want to settle their best cases and be stuck with the expense of trying the least compelling ones. Meanwhile Merck will, for its part, have the twin, and sometimes competing, aims of avoiding paying those weak claims and bringing an end to all the litigation that is distracting the company from its mission (developing and selling medicine) and sapping its assets. Merck has created a $675 million reserve for defense costs for Vioxx claims, after all. But that reserve is for defending Vioxx suits, not paying out on them.

How settlement negotiations finally play out, given all these competing interests, will be a function of how each of these parties assesses its litigation risks. If the plaintiffs’ firms go on to try a handful of cases and win millions of dollars each time out of the box, Merck will be at a serious disadvantage in the negotiation, and individual plaintiffs will be disinclined to settle at almost any price. On the other hand, if plaintiff firms—which only get paid if they win—perceive any given win to be an unlikely proposition, the value of their large inventory of cases will plummet. Merck would view that weakness as a disincentive to settlement.

As in any negotiation, all this uncertainty is ultimately the lubricant of a settlement. Any party who is certain of victory has no need to compromise. In the Vioxx context, one win by one plaintiff—in circumstances that may not be typical of the whole class of Vioxx plaintiffs—is hardly enough to give the plaintiffs’ bar as a whole any certainty about the outcome of Vioxx cases generally. But a few more significant plaintiff’s verdicts will tend to alter the psychology of settlement discussions as the parties try to extrapolate this equation:

(% chance of recovery) x (value per claim) x (number of claims) + (transactional costs of litigating a claim) x (number of claims) =Value of Vioxx Litigation

There are, by the way, mechanisms available to Merck to resolve its Vioxx problem short of litigating each case until they have all gone away, or paying out settlements until the company has wasted away. They include removing cases, where possible, from state court to federal court, then aggregating those cases in a single federal district court for consolidated pretrial proceedings. That has already happened in In re Vioxx Product Liability Litigation, MDL No. 1657, where there are already 1,106 actions pending in the Eastern District of Louisiana. These separate lawsuits will be driven through a uniform pretrial process of discovery that will tee up the cases for trial. At that stage, the MDL judge in Louisiana will send the cases back, for trial, to the federal district courts from whence they came.

Alternatively, Merck could just declare bankruptcy and force its creditors to work through a reorganization plan that would include some level of compensation fixed by the court for Vioxx-related injuries. A.H. Robins Co. did just that in Dalkon Shield-related litigation, which allowed that company to emerge from bankruptcy as an attractive takeover target for American Home Products, now Wyeth. And even if Merck does not actually declare bankruptcy, the threat of bankruptcy, and the possibility that many claimants will be left out in the cold or have small recoveries deferred for years, may drive even the most confident plaintiffs to the negotiating table.

Merck may also seek to negotiate, in the context of a nationwide class-action lawsuit, a global settlement of all Vioxx claims. There are already 120 suits seeking class-action certification pending around the country, and the MDL Court in Louisiana would be the likely forum for such a resolution. Sulzer Orthopedics Inc., since bought by Zimmer Inc., a manufacturer of hip and knee prosthetics, negotiated just such a resolution when it was confronted with massive product-liability claims. That settlement—for about $1.1 billion—resolved the claims of more than 25,000 class members. (Full disclosure:I represent the claims administrator in that class-action settlement.) That process enjoys the virtues of buying nationwide settlement of claims while avoiding bankruptcy.

Regardless of whether Merck is responsible for the injuries it’s accused of causing—and those accusations are serious—there isn’t any question that the company plays an important role delivering health care to Americans and as an engine of our economy. And while uncertainty may be settlement’s friend, too much uncertainty renders even settlement unlikely. Right now, there probably isn’t enough empirical evidence from which to “thin-slice” a prediction about Merck’s future. What we can be sure about, though, is that resolution of Merck’s and Vioxx plaintiffs’ litigation and economic woes won’t come any time soon, and they definitely won’t come cheap.