Insurers are consumers, too, Second Circuit says in Rezulin fraud case.

In an unusual case, the Second Circuit has ruled that a class of insurers has the same rights as a typical consumer under the New Jersey Consumer Fraud Act. In Desiano v. Warner-Lambert Co., the plaintiffs claimed that Rezulin, the diabetes drug made by Warner-Lambert, was more expensive than other diabetes drugs, and they would not have paid for it if the manufacturer hadn't misled them about its safety and efficacy. (326 F.3d 339 (2003).)

The U.S. District Court for the Southern District of New York dismissed the claim, characterizing the insurers as "essentially financial intermediaries" for the drug's real consumers, the insured patients. But the Second Circuit disagreed, holding in April that "the insurance companies were the direct victims of defendants' fraudulent marketing."

The plaintiffs' attorney, Richard Cohen of White Plains, New York, said it was the first appellate decision he knew of to hold that health insurers have the same protections as consumers.

The insurers--led by Blue Cross/ Blue Shield of Louisiana and Eastern States Health and Welfare Fund, an ERISA plan--accused Warner-Lambert of concealing information pertaining to its product; breaching warranties, including the presumed guarantee that the product was fit for sale; and unlawfully enriching themselves--all of which violated the New Jersey Consumer Fraud Act and Commercial Code and led to a financial loss for the insurers.

Warner-Lambert, headquartered in New Jersey, argued that the plaintiffs had no direct claim against it. It cited two RICO suits, Holmes v. Securities Investor Protection Corp. (112 S. Ct. 1311 (1992)) and Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc. (191 F.3d 229 (2d Cir. 1999).)

In Holmes, the plaintiff, Securities Investor Protection Corp. (SIPC), was an organization of securities brokers and dealers that insured investors against bankrupt members. When some members went bankrupt after Robert Holmes Jr. and others convinced them to invest in bad stocks, SIPC had to step in and reimburse its members' clients who had not invested. SIPC sought to recover its losses from Holmes and sued for treble damages under RICO. The Supreme Court held that there was no direct relation, as defined by RICO, between the plaintiffs and the defendant, and that the plaintiffs' financial losses were incurred by their members and were not directly attributable to the defendant.

In Laborers, the plaintiffs were insurers who sued several tobacco manufacturers, claiming that they had hidden the dangers of tobacco from the public. The insurers sought reimbursement for their cost of paying for the insured smokers' treatment. The Second Circuit used the Supreme Court's Holmes interpretation of RICO's requirements for proximate cause and found that the defendants' alleged tort had directly harmed the smokers, not the insurers.

In Desiano, the district court decided that the Holmes and Laborers interpretation was applicable, and it granted the defense's motion to dismiss.

But the Second Circuit disagreed. "The legal standard of proximate cause that is relevant to the case before us is not the law of RICO," wrote Judge Guido Calabresi for the court. "It is, lather, the law of New Jersey," which the court declared broader than RICO's.

More important, the court noted that in Laborers, "the plaintiffs' damages were entirely derivative of the injuries to their insured." But in Desiano, the insurers' economic loss was a direct result of Warner-Lambert's marketing and was "in no way derivative of damage to a third party." The suit was reinstated and sent back to the district court.

Rezulin's history is tumultuous. Prior to its 1997 approval by the FDA, it was advertised as being unusually effective and having "side effects comparable to placebo," despite Warner-Lambert's own clinical trial data, which plaintiffs claimed revealed that Rezulin users were three to six times more likely to suffer from liver ailments than patients who took a placebo.

In the span of the drug's three years on the market, the National Institutes of Health (NIH) and the FDA found that Rezulin was responsible for liver failure in several users. The Desiano plaintiffs alleged that, even as FDA and NIH warnings about possible side effects proliferated, and RezuliN's label was changed to reflect growing concerns, Warner-Lambert announced that Rezulin was safe, and that claims to the contrary were erroneous or misleading. Rezulin was withdrawn from the market at the FDA's request in 2000.

Desiano has benefitted plaintiffs outside the insurance industry. The West Virginia Supreme Court recently cited the decision's description of the drug's history in allowing a Rezulin users' class action suit to proceed. (McCaffrey v. Warner-Lambert, No. 30958, 2003 WL 21518104 (W. Va. 2003).)