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As if Merck & Co. did not have enough problems with thousands of Vioxx personal injury cases pending against the company, a state court in Atlantic City, N.J., has certified a nationwide class of third-party payors alleging that the corporation misrepresented or omitted material Vioxx information, causing all class members to erroneously list and pay for the drug. Inexplicably, the court ruled that the question of whether thousands of third-party payors were misled by Merck’s advertising was a “predominant” common issue that did not require an individual analysis of each purchase decision made by each member of the class. Even worse for Merck, the court held that New Jersey law applied in all 50 states, although a number of states preclude consumer class actions altogether and numerous other states require individual proof of reliance on the allegedly deceptive ads, also precluding class certification. Unless reversed on appeal, this ruling could subject Merck to refund claims by millions of Vioxx customers amounting to billions of dollars. International Union of Operating Engineers Local No. 68\Welfare Fund v. Merck & Co., No. ATL-L-3015-03 (Atlantic Co., N.J., Super. Ct. Law Div. July 29, 2005). At the outset, the court noted that the complaint had been filed on Oct. 30, 2003, and was thus unaffected by the federal Class Action Fairness Act of 2005. That law allowed removal to federal court of nationwide class actions filed in state court after Feb. 18, 2005. On behalf of a class of third-party payors, the complaint alleged that Merck violated the New Jersey Consumer Fraud Act (CFA) by misrepresenting or omitting material information with the intent that third-party payors’ decisions on placing Vioxx on their prescription drug formularies would be affected and that there was a causal relationship between the formulary decisions and the misrepresentations. As the court pointed out, while the element of traditional reliance required in a fraud case need not be proven in order to recover damages under the New Jersey CFA, a private plaintiff “must still prove a causal nexus between the alleged misrepresentation and his or her damages.” Id., slip op. at 15. What the court said In determining whether to certify the class, the key issue, according to the court, was whether the New Jersey act can be applied to a class action involving out-of-state plaintiffs and a New Jersey defendant (Merck is headquartered in New Jersey). An inquiry as to whether common issues were “predominant” must include an analysis of variations in state law. “This is because variations in state law and how the court would deal with such variations could overwhelm common issues and negate predominance.” Id., slip op. at 27. So far, so good, but the court then appeared to go off the track. After finding that New Jersey has the most significant relationship to the occurrences at issue and the most interest of any state in applying its “very strict consumer fraud law” to the case, the court analyzed each state law on consumer fraud to ensure that “no other state . . . has a significantly different policy than New Jersey and a stronger interest in applying its law to this litigation.” Id., slip op. at 37. Even after acknowledging that a number of states preclude class actions by private citizens and other states require individual proof of reliance on the alleged misrepresentation, the court found that as to every other state, applying the New Jersey CFA “to the instant matter would not frustrate the policies or intentions of [the other state's] law.” Id., slip op. at 37-63. This conclusion appears questionable. Those states that preclude consumer class actions or require individual reliance have what they view as good public policy reasons for doing so and applying New Jersey law seems to frustrate the public policies of those states. The court in Merck asked and answered the following question: “Do other states have any interest in denying their citizens the protection of New Jersey law if it offers them more protection than the law of plaintiff’s state? The answer is, no.” Slip op. at 35. Yet a strong argument could be made that, to the contrary, the answer is “yes.” Causation analysis The court’s analysis in Merck dealing with the causation requirement of the New Jersey CFA was also troubling to corporate advertisers. Although acknowledging that proof of a “causal nexus” necessitated proof by the plaintiff that the alleged misrepresentations and/or omissions were a “substantial factor” in each purchase decision by a class member, the court rejected Merck’s argument that individual inquiries would have to be conducted that would preclude proper adjudication in a class action. Id., slip op. at 64. Instead, the court pointed to the fact that the plaintiff had alleged that Merck has engaged in a “long-term, widespread, uniform pattern of deception,” thereby suggesting that “elements of fraud pervaded every aspect of Merck’s actions in developing and marketing Vioxx.” Slip. op at 65-66. As a result, the court concluded, the “plaintiff could prove that Merck’s alleged misrepresentations and/or omissions were a causal factor in all the third-party payors including Vioxx as a part of their medical benefits programs without a detailed analysis of each decision made by each member of the class.” Id. In effect, the court has turned proof of a “causal nexus” into a presumption of causation, triggered by the plaintiff merely characterizing the defendant’s advertising claims in disparaging terms. On this ground, too, a strong argument could be made that the court’s class-certification decision should be reversed. The court also appeared to ignore or mischaracterize previous New Jersey state court decisions that refused to certify nationwide claims based on the application of the New Jersey CFA. For example, Fink v. Ricoh Corp., 365 N.J. Super. 520 (Essex Co., N.J., Super Ct. 2003) involved a putative nationwide class of purchasers of Ricoh’s RDC-1 digital cameras. The complaint alleged that the defendant, headquartered in New Jersey, had violated the New Jersey CFA by disseminating promotional materials containing false and misleading representations, as well as material factual omissions, which resulted in damage to the entire class under the statute. As was true in Merck, the court in Fink analyzed consumer fraud laws in other states, but came to a very different conclusion. After explaining that other states require a plaintiff to prove reliance under their consumer protection statutes and that several other states bar private class action consumer fraud suits, the Fink court concluded that “[t]hese statutes reflect the public policies of the states which have enacted them . . . .To ignore the policies of these states by applying New Jersey consumer fraud law across a nationwide class of potential claimants primarily because Ricoh has its principal place of business in New Jersey would frustrate the public policies of those other states.” 365 N.J. Super. at 585. In conclusion, the court held that “[w]ith the need to litigate individual issues of fact inherent in a class action and those necessitated by application of the consumer fraud laws of up to 50 states, plaintiffs have failed to satisfy their burden to demonstrate a predominance of common issues over issues of fact and law which affect only individual members of the proposed nationwide class.” 365 N.J. Super. at 599. The Merck court attempted to distinguish Fink by noting that the court there pointed out that if other states’ policies would not be frustrated by applying New Jersey law, it would not be inappropriate to do so. Slip op. at 64. As discussed above, it was precisely because the court in Fink concluded that other states’ public policies would be frustrated by application of New Jersey law that it declined to certify a nationwide class. Other considerations Other important issues loom that were not addressed by the court in Merck. Denial of due process is one of them. Courts repeatedly have pointed out that the state where putative class members are exposed to the challenged ad claim, normally their residence, is the state with the most significant relationship to the occurrence and parties, not the defendant’s principal place of business. 365 N.J. Super. at 591-92. As the court in Fink went on to emphasize, “[t]he court would deprive the parties adversely affected of due process of law, particularly if the court arbitrarily applied the law of a state lacking ‘a significant contact or significant aggregation of contacts’ to the claims asserted by each member of the plaintiff class.’ ” Id. Equally, if not more important, are First Amendment considerations. It could be forcefully argued that there is a strong chilling effect on free commercial speech if false advertising cases are allowed to proceed without a requirement that each plaintiff must demonstrate that he or she was exposed to and relied upon the challenged advertising. Thus, under this theory, First Amendment considerations would preclude all false advertising class actions, whether on a state-by-state or nationwide basis, on the ground that common issues are not predominant. Even if the New Jersey class certification ruling is reversed, Merck is by no means out of the woods on false advertising. As the lower court observed in that case, there are more than 100 class action complaints filed in the federal multidistrict litigation for Vioxx, In re Vioxx Products Liability Litigation, MDL No. 1657 (E.D. La.), 15 of which are third-party payor actions, presumably based on alleged false advertising. Merck, slip op. at 68. Other state-by-state consumer-protection class actions can be expected, particularly in those states where proof of individual reliance is not required. Even if new lawsuits are removed under the new statute, the danger for corporations is that federal courts will apply state law the way the Merck court did. With all advertisers at risk from a similar avalanche of class actions, courts recognizing the First Amendment implications would be the most effective way to call a halt. Hugh Latimer is a partner at Washington-based Wiley Rein & Fielding. He has experience in a broad range of complex litigation involving advertising, sweepstakes, trademark, antitrust, trade regulation, international trade and other commercial law issues. He can be reached at [email protected].

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