How district courts should distribute leftover class action settlement money to charities was up for debate at the U.S. Court of Appeals for the 1st Circuit.

On Feb. 8, the court heard oral arguments in Rohn v. Dana-Farber/Harvard Cancer Center, an appeal by absent class members of an order to distribute the first $4 million of more than $11.4 million in residual consumer settlement funds to Dana-Farber.

In the underlying case, In re Lupron Marketing and Sales Practices Litigation, consumers and health insurers claimed they overpaid for Lupron, a prostate cancer drug, and that the drug makers fraudulently inflated Lupron’s average wholesale price, which set reimbursement rates. The defendants were Abbott Laboratories and Takeda Pharmaceutical Co., as well as TAP Pharmaceutical Products Inc., a joint venture of the two until Takeda took over in 2008.

A settlement approved by the court in 2005 allocated $110 million to third-party payors and $40 million to consumer claimants.

In August 2010, Judge Richard Stearns of the District of Massachusetts applied the so-called doctrine of cy pres, or “next best,” which allows courts to put unclaimed funds to their best compensation use in order to indirectly benefit of a class. He awarded the unclaimed funds to Dana-Farber/Harvard Cancer Center and the Prostate Cancer Fund. The award was to promote research on prostate cancer and other Lupron-treatable diseases In November 2010, he order the first payment.

The appeal was brought by “absent class members in a certified class of [Lupron] consumer purchasers,” according to the appellants’ brief.

The appellants in their brief claimed the consumer class had only received only 50 percent of their out-of-pocket expenditures for Lupron in the initial settlement. They dispute a district court finding that consumers were paid 167 percent of their listed out-of-pocket expenses or insurance co-payments. They claim the damages expert did not calculate actual damages in this case and underestimated consumer damages by assuming that all consumers who had any form of Medigap insurance had no out-of-pocket expenditures for Lupron. Medigap is private health insurance that covers a patient’s 20 percent Medicare cost share.

They also claimed they were entitled to treble damages based on their Racketeer Influenced and Corrupt Organizations Act (RICO) and consumer fraud claims. They pointed out that plaintiffs in similar cases were awarded treble damages

They further claimed that the Dana-Farber doctors directly received “spread” dollars from Lupron, which is the difference between what TAP charged doctors and the reimbursement doctors could get from public and private insurance sources.

In their brief, the appellants claim the residual payment will go to “non-class member, unnamed co-conspirator defendant doctors.” The brief also stated that class members “should not have to fight the court-appointed Class Counsel and the district court…to be paid in full, especially when the settlement proceeds are available.”

In his brief, class member William Porter opposed the absent class members’ appeal on several grounds. Porter first argued that the appeal was untimely because Stearns issued his cy pres order to give excess money to Dana-Farber in August 2010. Next, Porter argued that the appellants lack standing to appeal because they are “unnamed, nonparty class members who accepted the distribution plan under the Lupron class settlement [and] who have received greater than 100% return for their losses.”

Porter also argued that the appellants and their counsel, Donald Haviland Jr., a founding partner at Haviland Hughes, participated in the settlement and agreed in a written document filed with the district court that they would not appeal any final judgment in the underlying case.

Porter contends that a district court has discretion to approve a cy pres distribution of funds when payouts to participating class members are more than 100 percent of their losses. In this case, Porter argued, each consumer Lupron class participant collected about 167 percent of his or her damages.

In its brief, Dana-Farber, an interested party-appellee in the case, also claimed the appeal was untimely. It argued that the settlement agreement expressly gave the district court the discretion to distribute the excess settlement money.

Dana-Farber’s brief asserted that the “district court undoubtedly acted within its broad discretion” to “support research that would indirectly benefit the entire consumer class, including the many absent members.”

Chief Judge Sandra Lynch sat on the panel along with Judge Kermit Lipez and retired U.S. Supreme Court Justice David Souter, who heard the case by designation.

During oral argument Lynch told Haviland that his clients “gave up the right to attack the settlement agreement on appeal.”

“The issue in front of us is whether there was an abuse of discretion as to this cy pres distribution,” Lynch said.

Haviland said his clients released their claims against TAP but didn’t give up the right to seek the unclaimed funds.

“The implementation agreement is limited to the parties,” Haviland said. “The Dana-Farber group who comes in here and tries to enforce that right doesn’t have any rights under the implementation agreement to say we can foreclose the plaintiffs.”

Haviland later said that treble damages for the claimants would add up to about $9.5 million.

Thomas Sobol, a Cambridge, Mass., partner at Hagens Berman Sobol Shapiro who argued for Porter, said the settlement and implementation agreements gave Stearns the discretion to deal with any residual consumer settlement funds. “It was unfettered in that regard,” he said.

Lipez mentioned that, as Haviland pointed out, the case involved an economic crime. “The underlying litigation was not about treatment [or] the need for a cure,” Lipez said.

That point wasn’t a major one in Haviland’s brief or in lower court proceedings, but “I do agree that I did hear that today,” Sobol said.

“If a plaintiff class has received their single damages of economic harm, then they don’t have a legal right to anything more,” Sobol said.

Sobol later argued that the vast majority of the class had prostrate cancer and the case was dragging on for years. “It was not an abuse of discretion for Judge Stearns to decide, having the discretion available to him, to honor those claimants who couldn’t participate through a very significant cy pres program for scientific research to abate the disease from which they suffered,” he said.
 

Lynch later said she was “perturbed by the idea that the parties simply say to a federal district court judge, ‘It’s up to you, exercise your discretion come up with something.’ “

“How does it come out that we get settlement agreements that don’t involve the input of the parties about what should happen to any cy pres fund?,” Lynch asked. “It just strikes me as far too open….As I look at the larger picture, I do have some concerns about that.”

Generally, “it’s pick your poison,” Sobol said. He said there have been abuses in other cases in which parties chose recipients for class action cy pres awards. “Then the question is maybe make sure the court’s involved,” Sobol said.

“The appellant objectors are really trying to put the district court in a logical straightjacket that compels the district court to prioritize the interest of the claimants that have appeared above the absent class members that for whatever reasons have not appeared,” said Martin Fantozzi, the co-managing partner at Boston’s Goulston & Storrs, who argued for Dana-Farber.

Sheri Qualters can be contacted at squalters@alm.com.