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A fraud suit brought by health insurance companies over the controversial anti-diabetes drug Rezulin has been revived by the 2nd U.S. Circuit Court of Appeals. Reversing a district court victory for drug-maker Warner-Lambert Co., Judge Guido Calabresi, writing for the 2nd Circuit, said major health insurers had adequately stated a claim they were the “direct victims of Defendants’ fraudulent marketing” in Louisiana Health Services Indemnity Co. v. Warner-Lambert Co., 01-9318. Southern District of New York Judge Lewis A. Kaplan had ruled the plaintiffs had failed to allege the required causal connection between the marketing of the drug and their financial injury. Rezulin’s introduction in 1997 by Warner-Lambert Co. subsidiary Parke-Davis & Co. was hailed as a sign of real progress in the treatment of Type II diabetes. And although the Food and Drug Administration approved the drug for use in conjunction with insulin or for use with two other drugs in January 1997, and then approved its use as a “stand-alone” therapy in August 1997, the FDA later accused the company of making “false and misleading claims” about the drug’s effectiveness. But the FDA began hearing reports of liver failure and liver injury in some patients who took the drug, and in 1998 the National Institutes of Health stopped a clinical study of the drug out of concern for the safety of patients. Warner-Lambert was also forced to change labels on the drug several times, on one occasion to state that regular liver testing should accompany its use. Another change came after the FDA allowed the drug to stay on the market, but only if labeling made it clear that Rezulin could not be used as a stand-alone drug. The health service providers charged that Warner-Lambert continued to represent the drug as safe even though the company had reported to the FDA that 31 users had died during a six-month period in 1998, and the company continued to lie about the drug even as evidence of liver failure in patients mounted. The company ultimately removed Rezulin from the market in March 2000. Judge Kaplan granted the company’s motion to dismiss in October 2001, ruling the health companies could not establish that Warner-Lambert’s actions were the proximate cause of their economic injuries. Kaplan based his ruling on two decisions , Holmes v. Securities Investor Protection Court, 503 U.S. 258 (1992) and Laborers Local 17 Health and Benefit Fund v. Phillip Morris, Inc., 191, F.3d 229 (2d Cir. 1999). In Laborers Local, the 2nd Circuit found a lack of proximate cause in a racketeering action brought by a benefit fund. The court said the fund had not been directly harmed and had sustained only “derivative” injuries when it paid for medical treatment of individual smokers. Judge Kaplan said the health providers’ complaint against Warner-Lambert failed under the test of Laborers Local. And even if Laborers Local was not controlling, Kaplan said, the claims of the health insurers would fail under the factors for determining causation outlined in the Holmes case. The judge characterized the health care providers as “essentially financial intermediaries” who “doubtless passed on all or much of the costs they incurred to employers and perhaps even to insureds themselves.” Kaplan also said the people claiming they were injured by Rezulin could recover the cost of the drug and the cost of any testing or monitoring needed to assess potential liver damage. Writing for the 2nd Circuit, Judge Calabresi said the court disagreed with Judge Kaplan that the “relevant legal standard” for the case was set by the rulings in Holmes and Laborers Local. He said “both of those cases arose under RICO, and therefore the applicable standard of causation in those cases was the standard that was established by that federal statute.” The appropriate standard, Calabresi said, was New Jersey’s common law on proximate cause because that was the state in which the cause of action arose. Warner-Lambert is headquartered in Morris Plains, N.J. In contrast to the “derivative” damage that the fund suffered in Laborers Local, he said, “Plaintiffs allege an injury directly to themselves; an injury, moreover, that is unaffected by whether any given patient who ingested Rezulin became ill.” Judge Calabresi said the plaintiffs’ alleged injuries could not be considered derivative because they were compelled to pay for a drug that cost three times as much as the cheaper alternatives. It was Warner-Lambert’s alleged misrepresentations, he said, that caused the health care providers to overpay for Rezulin. Calabresi added that “Although this court has not to date held that insurance companies are, IN ALL INSTANCES, the ‘purchasers’ of the drugs for which they reimburse pharmacies, we like several other courts, have indicated that in a variety of consequences, they are the buyers.” More relevant, he said, was the fact that the 2nd Circuit and other courts “have long recognized” the right of health insurers to “recover from drug companies amounts that were overpaid due to illegal or deceptive marketing practices.” Judges Pierre N. Leval and Robert Katzmann joined in the opinion. Representing the plaintiffs were Richard W. Cohen, Stephen Lowey and Peter D. St. Phillip Jr. of Lowey Dannenberg Bemporad & Selinger in White Plains, N.Y.; and Mark D. Fischer and Mark M. Sandman of Rawlings & Associates in Louisville, Ky. David Klingsberg, Maris Veidemanis and Robert Grass of Kaye Scholer represented Warner-Lambert and its subsidiaries.

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