By Heather Won Tesoriero, Sarah Rubenstein and Jamie Heller
The Wall Street Journal
Merck & Co.'s $4.85 billion settlement over its withdrawn painkiller Vioxx largely vindicates its unusually aggressive strategy for fighting off tens of thousands of liability claims.
While the price tag isn't cheap, it brings the drug maker a measure of certainty and removes a cloud of litigation and bad publicity that had promised to distract it for years.
Ever since Vioxx was pulled from the market on Sept. 30, 2004, because it was tied to higher risk of heart attack and stroke, Merck had vowed to defend liability suits one by one. The scorched-earth battle plan yielded early results as some key Merck victories put plaintiffs on notice that the odds were against them. And the daunting caseload gave judges 26,600 reasons to push for a compromise.
Investors demonstrated their approval of the deal, sending Merck shares up $1.13, or 2.1%, to $55.90 in 4 p.m. New York Stock Exchange trading Friday.
A festive mood prevailed in the New Orleans courtroom where the agreement was announced Friday morning, with lawyers from both sides standing to recite a long list of thank-yous beneath a giant screen on which the settlement plan was projected. The key players had been negotiating nearly all day and night for three days straight.
Bruce Kuhlik, Merck's general counsel, said the company had proved it could win in court. Those early successes "enabled us to reach a reasonable resolution for such a reasonable amount of money," he said.
About 20 million Americans took Vioxx, which went on the market in 1999 and was widely advertised as a treatment for arthritis. Most of the suits were filed after Merck withdrew the drug.
Under the settlement plan, plaintiffs will have to show that Vioxx was taken for at least 30 days. The person on Vioxx must have suffered a heart attack or ischemic stroke — one that involves blockage of arteries to the brain — within 14 days of using the drug. Payouts will be lowered if the person had cardiovascular risk factors such as obesity or diabetes. Merck will set up two funds, a $4 billion one for heart-attack claims and a $850 million one for stroke claims.
The deal will only go ahead if 85% of eligible claims are enrolled. Plaintiffs' lawyers can only participate if they recommend the program to all their clients.
There could be a big payday for some plaintiffs' lawyers who led the litigation. Lawyers whose clients receive money from the settlement will pay an agreed-upon percentage to a legal-fees fund. A court-appointed committee will then disburse fees to lawyers who did the legwork on the litigation, with an individual firm's take depending on its efforts.
Beasley Allen, a plaintiffs' firm in Montgomery, Ala., has roughly 8,300 cases in the Vioxx litigation. Herman, Herman, Katz & Cotlar in New Orleans has 100 to 120, after reviewing 3,000. Russ Herman, a member of the plaintiffs' steering committee, estimates the plaintiffs' firms that developed the litigation spent $100 million.
One factor that worked in Merck's favor: Over the past decade, judges have increasingly controlled the number of cases being tried at any one time in big liability litigation. That meant Merck wasn't overwhelmed by the sheer number of cases, said David Bernick, a product-liability defense lawyer at Kirkland & Ellis LLP.
Also, many plaintiffs had trouble proving that Vioxx — and not a health problem such as diabetes — was responsible for a particular heart attack or stroke. Merck won 11 of 16 cases that reached trial, including four victories in five cases considered to be bellwethers.
Still, plaintiffs didn't come away empty-handed. At the first Vioxx trial, a jury awarded a Texas widow $253.4 million in August 2005 — a judgment later reduced to $27.2 million, including interest.
Merck set aside $1.9 billion for litigation costs — not including any payouts to patients — and has spent $1.2 billion of that so far. By settling now, it avoids piling up hundreds of millions of dollars a year in legal fees. Merck said it expects to record a pretax charge of $4.85 billion in the fourth quarter to cover the cost of the agreement.
It still faces some 10,000 to 15,000 claimants who aren't expected to qualify for the settlement. Some of these claimants suffered ailments other than heart attack or stroke, or hadn't had 30 pills of Vioxx dispensed to them. The company believes these cases are weaker.
Talks toward a deal gathered steam last December, said Mr. Herman, the plaintiffs' lawyer. That's when U.S. District Judge Elden E. Fallon of New Orleans said the four judges overseeing nearly all the cases wanted both camps to think about an endgame. The four judges included Judge Fallon and state-court judges in Texas, California and New Jersey, where Merck is based. The judges had good reason to want a solution: Merck's strategy threatened to clog their dockets for years.
The initial settlement meeting among the parties took place Dec. 11. "When you have three judges running 90% of the litigation asking you to sit down, I don't think you're going to say no," said Judge Carol E. Higbee, who was overseeing cases in New Jersey.
Over the ensuing months, Merck and its adversaries found another spur to negotiate: The statute of limitations for filing new suits was about to expire in many states. Merck says the deadline has now passed in more than 40 states. That meant both sides could estimate more accurately how many plaintiffs would be in line for payouts.
"We really should know the universe of claims at this point," said Mr. Kuhlik, the Merck general counsel. "We've really done everything we can to ensure that this resolves the vast majority of the cases and that we've closed the door on new filings."
The plaintiffs' lawyers had stated early on their desire to sit down with Merck. The lawyers were generally working on a contingency-fee basis, meaning they were spending millions of dollars upfront on litigation in the hopes of a payout.
[Adding It UP]
Money figures weren't discussed until August, according to plaintiffs' attorneys who were involved with negotiations, and the $4.85 billion sum first surfaced in mid-October. Along the way, attorneys from both sides examined random samples of cases from firms around the country to get a handle of what the cases looked like.
Last weekend, Judge Fallon ordered the parties to New Orleans to negotiate and exchange drafts of agreements each day.
When money was first discussed in August, "we came in higher and Merck came in substantially lower," said Christopher Seeger, a key lawyer for the plaintiffs. "We got to a point of major stalemates and breakdowns many times. There were many times where we thought we could not do a deal, but the judges forced us back."
Mr. Seeger said the plaintiffs refused to budge on two points: streamlining the administrative process for plaintiffs, such as limiting the number of medical records required, and the $4.85 billion figure. He said a turning point in the negotiations came four or five months ago, when both sides developed more mutual trust.
"If I have any concerns, it's making sure that the system we've put in place gets the money to the victims," Mr. Seeger said. He said plaintiffs should receive their money within a year to 18 months.
Merck's outside counsel, Theodore Mayer of Hughes Hubbard & Reed LLP, said one model for Merck's settlement was Bayer AG's settlement of cases surrounding its cholesterol drug Baycol, which was withdrawn from the market in 2001 after it was linked to muscle breakdown.
Bayer's settlement "made very clear which cases were in and which cases were out," Mr. Mayer said. Plaintiffs had to provide "objective proof" to show they qualified for money.
"That was a very, very important message for us," Mr. Mayer said.
A major objective for Merck was avoiding the fate of Wyeth, which in 1999 allotted $3.75 billion for a class-action settlement to resolve litigation over its former diet drugs — including half of the popular "fen-phen" combination — that were linked to heart-valve damage. Wyeth's ultimate costs have ballooned to more than $21 billion because some people opted out of the settlement and continued with litigation.
The fen-phen settlement permitted patients who later determined that they had heart-valve damage to pursue claims against Wyeth. The idea of the Vioxx settlement is to avoid payments to someone who has a heart attack now and thinks it might be linked to years-ago use of Vioxx.
Mr. Herman of the plaintiffs' committee said it's too soon to say whether Merck's defense tactics can apply to other liability cases. If they can, he said, "the plaintiffs' bar is going to have to find a completely new strategy."