Can the bankruptcy court force non-consensual third party releases? The United States Bankruptcy Court and the United States District Court, both for the Southern District of New York, come to opposite conclusions. The Bankruptcy Court says “yes,” the District court, “no.” Cf. In re: Purdue Pharma L.P., 633 B.R. 53 (2021); In re: Purdue Pharma L.P, 635 B.R. 26 (2021). The debate raises some interesting questions about how we handle mass tort claims.
The forced third party releases in the Purdue case involve the release of claims against the Sackler family who at all times controlled Purdue.
Both courts acknowledged that Purdue played a significant role in the explosion of opiate addiction in the United States over the past two decades that is causally related to the over prescription of highly addictive medications, especially Purdue’s OxyContin.
Perdue initially introduced a morphine based controlled release product in the 1980s, labeled MS Contin. The controlled release aspect of MS Contin was an improvement on prior opiate based meds that controlled pain for a relatively short period of time. As an opiate–based product, physicians and patients alike, however, remained wary of its use, and so MS Contin was not a problem.
In 1995, Perdue succeeded in gaining FDA approval for a non-morphine drug, the controlled released, semisynthetic opioid analgesic OxyContin. Purdue marketed OxyContin as a drug that posed virtually no threat of either abuse or addiction. Emphasizing its supposed non-addictive nature, Purdue encouraged doctors to prescribe OxyContin for an array of pain, including arthritis and osteoarthritis. Purdue’s website urged patients to “overcome” their “concerns about addiction” and to utilize OxyContin for a range of non-cancer and other nonmalignant pain. (Of course, when opiates are used in the treatment of pain likely to be terminal, addiction is less of a concern).
The FDA caught on to the dangers of OxyContin and the falsity of Perdue’s claims of its non-addictive qualities and, in 2001, required Purdue to remove from its drug label that claims OxyContin presented a very low risk of addiction and ordered it to instead provide the highest level of safety warning that the FDA can require for an approved drug.
Plaintiffs began to file individual class actions against Purdue in 2001. Those lawsuits sought to hold Purdue liable on several product liability theories, in addition to claims for violation of the state consumer protection statutes, conspiracy and fraud. Many of those early cases sought certification as class actions, but they were denied largely due to the contention that drug addiction is an individualized question of fact not suited to a class action.
State and federal investigations followed the civil litigation seeking to determine Purdue’s role in what was then an ongoing opioid crisis. In 2007, Purdue entered into a settlement with 26 states, agreeing to pay $19.5 million and abide by a program that would last at least ten years designed to identify and prevent potential abuse and diversion of OxyContin. In exchange, the settling states released their claims against Purdue and about seventy-seven members of the Sackler family. Excluded from any release were, among others, consumers and their private rights of action.
At about the same time as Purdue was settling with the states, it pled guilty to feloniously misbranding OxyContin and agreed to pay $600 million-to the federal government and to each state that elected to participate in the settlement. The settlement that did not compromise individuals’ claims.
The 2007 settlements apparently did not quell Purdue’s effort to hype OxyContin. Moreover, and critical here, various members of the Sackler family, according to the courts’ opinions, continued aggressively to push OxyContin, turning a blind eye to its evident abuse. All the while the opioid crisis got worse.
At the same time Purdue continued to push OxyContin in the face of the 2007 settlements, it began to vastly enhance its payouts to the Sacker family. For instance, Purdue went from distributing less than 15% of its revenue to distributing as much as 70%. The distributions, most of which went to the Sacklers, totaled $10.4 billion between 2008 and 2016, with approximately $4.6 billion used to pay the owners’ pass through taxes. The District Court noted that one of the Sacklers had referred to this bailout of profits as a “milking” program.
By 2018, Purdue confronted significant litigation across the country. Those claims in the aggregate totaled into the trillions of dollars. Purdue took bankruptcy in September 2019. One of its first orders of business was to seek an injunction halting all actions against Perdue and its “current and former owners,” i.e., the Sacklers.
After the Court granted the injunction, Purdue, and the Sacklers, pursued a settlement. Settlement was accomplished with world renowned mediators. That settlement became part of the plan confirmed by the Bankruptcy Court.
Relevant here, one of the critical terms of the settlement was that in exchange for the release of third-party claims against over 1,000 individuals and entities related to the Sackler family, the Sackler family would pay $4.275 billion to the Purdue estate.
The interest groups entitled to vote on the bankruptcy plan incorporating the third party releases, voted overwhelmingly in favor—most approving by 85% of the vote. Given this claimant support, along with its conclusion that the settlement was a good one, and because the Purdue plan would fail if the settlement were rejected, the Bankruptcy Court approved the plan.
The Bankruptcy Court, in its opinion addressing its plan confirmation, noted testimony addressing the fact that litigants would be unlikely to be able to reach much of the Sackler wealth, even if they prevailed in securing a judgment, in part because the Sacklers had disposed of significant portions of their assets by placing them in trusts in the Isle of Jersey—trusts that were reputed to be virtually unreachable by creditors.
The District Court did not necessarily disagree with any of the Bankruptcy Court’s reasoning relative to the merits of the settlement, but nonetheless found that it had no statutory or other authority to force nonconsensual third party releases. (The legal analysis of both courts is fascinating, but beyond the scope of this article).
The Purdue case presents a least a couple of interesting questions. The first is whether there should ever be an instance where a court can force a litigant to essentially forego litigation and take a settlement that the court and other similarly situated individuals believes is the best possible result. In other words, don’t we all have the right to be wrong? The second is whether the legislature should revisit the restrictions placed around class action litigation. There must be a better way to address mass claims such as engendered against Purdue that would allow all parties who want it their day in court. It will be interesting to see how the Second Circuit, and perhaps the Supreme Court think about this important issue.