A federal appeals panel has reinstated a consolidated class action filed against Amgen Inc. on behalf of employees whose retirement plans lost value following the disclosure that the company promoted two anemia drugs for off-label uses.
The U.S. Court of Appeals for the Ninth Circuit ruled on Tuesday that Amgen did enjoy a "presumption of prudence" in continuing to recommend the company’s stock to employees despite knowing about the impending revelation. The court disagreed with the Amgen defendants that they were entitled to the presumption under its own 2010 precedent in Quan v. Computer Sciences Corp.
"We conclude that the presumption of prudence does not apply, and that, in the absence of the presumption, plaintiffs have sufficiently alleged violation of the defendants’ fiduciary duties," Judge William Fletcher wrote.
"In Amgen, the Ninth Circuit said that if a plan does not require or strongly encourage employer stock, we will not apply the presumption of prudence," said lead plaintiffs’ attorney Mark Rifkin, a partner at New York’s Wolf Haldenstein Adler Freeman & Herz. "Just because they authorize the fiduciaries to offer the company stock fund as an investment option, that doesn’t require them to do so nor encourage them to do so."
Robert Davis, a partner at Mayer Brown in New York who represents the Amgen defendants, referred questions to company spokeswoman Christine Regan, who issued a statement via email: "Amgen is currently in the process of reviewing this decision. We plan to vigorously defend against these allegations."
The class action followed revelations about the safety of two drugs used to treat anemia, Aranesp and Epogen. Aranesp made up about half of Amgen’s $14.3 billion revenue in 2006, according to the Ninth Circuit’s opinion.
But in the years leading up to that, several clinical trials and the FDA had raised concerns about the safety of the drugs. Amgen’s executives, including chief executive officer Kevin Sharer, a defendant in the U.S. Employee Retirement Income Security Act action, assured the public that the drugs were safe. According to the opinion, Amgen also marketed Aranesp for off-label uses, or to treat conditions for which the U.S. Food and Drug Administration had not approved their use, such as in HIV patients.
In 2007, the FDA mandated a "black box" warning against off-label use of both drugs, citing studies that found that when given in amounts above the recommended doses, they increased the risks of death, blood clots, strokes and heart attacks in patients with kidney failure and resulted in rapid tumor growth in head and neck cancer patients, the opinion says. Even at recommended doses, the warning concluded, the drugs could cause death in cancer patients not undergoing chemotherapy and blood clots in patients following orthopedic surgery.
Following a congressional investigation into Amgen’s off-label marketing practices, an FDA advisory committee voted to expand the warnings and conduct more studies. In one year, sales of Aranesp declined by half, according to the opinion. Amgen’s stock plummeted 33 percent in the 1 1/2 years leading up to the FDA’s expanded warnings.
On December 19, Amgen agreed to pay $612 million to resolve criminal and civil claims over the marketing of Aranesp and five other drugs for off-label uses. The payment was the single largest criminal and civil False Claims Act settlement involving a biotechnology firm in U.S. history, according to the U.S. Justice Department. The deal includes $150 million to resolve criminal liability; Amgen pleaded guilty in federal court in the Eastern District of New York to a single misdemeanor count of off-label marketing of the drug.
In 2007, an employee of Amgen and an employee of its Puerto Rican subsidiary, Amgen Manufacturing Ltd., filed the class action, alleging ERISA violations. They named Amgen and its subsidiary, as well as members of the board of directors and the fiduciary committees of its retirement plans. In 2009, the Ninth Circuit reversed a decision by U.S. District Judge Philip Gutierrez dismissing the plaintiffs for lacking standing.
In the consolidated class action, which added three more employees, the plaintiffs alleged six counts of violations of fiduciary duty against the Amgen defendants.
In 2010, Gutierrez dismissed Amgen from the suit, concluding the company was not a plan fiduciary. He dismissed the case against the other defendants, concluding that the plaintiffs had not overcome the "presumption of prudence." In Quan, which was decided later that year, the Ninth Circuit adopted the presumption "when plan terms require or encourage the fiduciary to invest primarily in employer stock."
Quan is the most recent and leading Ninth Circuit decision to apply the presumption of prudence, a standard being addressed by circuit courts across the nation, Rifkin said.
"There is a tension between the duty to follow the plan documents scrupulously on the one hand and the general duty to be prudent on the other," he said. "To balance those duties, the courts over the last several years have developed the presumption of prudence when a company strongly encourages company stock."
In the Amgen case, the panel found that the plan terms did not articulate such a requirement or encourage employees to invest in its common stock. Fletcher wrote that "an explicit statement that plan fiduciaries may offer a Company Stock Fund as an investment to participants does not tell us that they were encouraged to do so within the meaning of the presumption of prudence," citing the Second Circuit’s February 27 ruling in Taveras v. UBS A.G.
The panel concluded that language in the plan—limiting Amgen’s common stock to 50 percent of a participant’s total holdings, for example—does more to discourage such investments.
"We conclude that defendants were neither required nor encouraged by the terms of the Plans to invest in Amgen stock, and that they are not entitled to a presumption of prudence," Fletcher wrote.
The panel also concluded that the class action had sufficiently alleged that the defendants, as fiduciaries, had material misrepresentations and omissions that inflated the company’s stock and later precipitated its downfall. They failed to remove the company’s stock from the plan’s investment options once they knew of the problems associated with Aranesp, the court said.
The panel reversed Gutierrez’s finding that Amgen was not a fiduciary, concluding that under the plan’s terms the fiduciary committee acted on its behalf.
The duties of the plan fiduciaries are no fewer to employees than to the general public, the panel concluded, citing a related securities action. In that case, Gutierrez has certified the class action and the Ninth Circuit affirmed in 2011. The U.S. Supreme Court affirmed that decision on February 27.