When Merck & Co. Inc. announced it had decided to settle most of its estimated 60,000 remaining Vioxx claims for $4.85 billion, people wondered if this was a detour from Merck's previously announced strategy of fighting each case individually--and possibly an acknowledgment of that plan's failure.
But former Merck General Counsel Ken Frazier, who engineered the original strategy, refuted that suggestion in an investor conference call following announcement of the settlement. "No, we don't see this as a change in strategy," said Frazier, now president of Merck's global human health division. "In fact, we think this responsible resolution is the product of that strategy."
Specifically, because Merck took an informed gamble in the courtroom and won 11 of the 16 Vioxx cases that went to trial, it gained the clout to scale down the eventual settlement amount. It's a risky strategy, but as evidenced by the Vioxx settlement, it also can pay off big.
"The big story is there is real value in taking a litigation strategy that results in some number of cases actually being tried," says Richard Nagareda, director of Vanderbilt University Law School's litigation and dispute resolution program. "That's a real expense to any corporation. But the final price tag of the Vioxx settlement underscores quite dramatically that this strategy worked well for Merck."
Merck's problems began when a study surfaced in 2002 that showed its blockbuster painkiller Vioxx possibly elevated risk for heart attacks. Initially there was some scattered litigation as studies built up evidence against the drug.
But all hell broke loose on Sept. 30, 2004, when Merck voluntarily pulled Vioxx from the market after one of its own clinical studies seemed to back up the suspicions. Almost immediately the company was flooded with suits--and quickly realized it was facing thousands, if not tens of thousands, of cases.
"Right from the start, Ken Frazier, with the approval of the board and executive team, decided the only reasonable way to look at this was to examine the cases one by one," says Kent Jarrell, spokesperson for the Vioxx defense team. "You didn't have a signature illness or injury like fen-phen or asbestos. You had injuries--primarily heart attacks and strokes--that unfortunately are very commonplace in the U.S. but also have a variety of other causes."
Merck examined the cases by taking them to trial, which gave its legal team time to sort through the science and
clinical data. Discovery revealed the tenuous link between Vioxx and health problems that may have been pre-existing. That allowed Merck, despite some early losses, to defeat the more questionable claims and maintain a winning courtroom record. "Lawsuits [in the pharmaceutical and biological] areas tend to get ahead of the science," says Bob Schick, co-head of Vinson & Elkins' litigation section. "I think Merck made the right call in trying cases."
Of course, the risk of that strategy is that not every company will come out on top as Merck did.
"Winning a majority of cases is key to a strategy of trying a few in order to drive down the settlement amount," Nagareda says. "You are going to lose some cases. If your estimate of your chances is wrong, the price tag for any overall settlement would possibly go up."
But Merck had a strong case with respect to individual causation: It suspected from the start that it would be hard to distinguish a Vioxx-related heart attack or stroke from one that would have occurred even without taking
"[The Vioxx settlement] does show that if a defendant really thinks it's not liable to all the people suing that defendant, they should take some of those cases to trial," Nagareda says. "But you have to be confident that you have a good case on the science to take a position that basically says to the plaintiffs' lawyers, 'We dare you to take these cases to trial.' "
Merck did just that, confident that the plaintiffs' bar would have a hard time showing individual causation--and in case after case, this proved to be true.
Blood in the Water
But it took more than confidence and a good record for Merck to negotiate a winning settlement--it took perfect timing. "Everything had to line up in a row," Jarrell says. "It's a clich?(C), but it really was the right agreement for the right time."
To begin with, three years of taking cases to trial allowed the statutes of limitation for new claims to run out in most states.
In addition Vioxx had been off the market for long enough--and its adverse health effects show up quickly enough after use--that latent claims down the road were not a factor. If future claims had been a possibility, the settlement could have made Merck a target for plaintiffs' attorneys rather than providing closure.
"Look at what happened to Wyeth in the fen-phen settlement where they immediately went to the settlement table," says Ted Frank, tort reform advocate and director of the American Enterprise Institute Legal Center for the Public Interest. "A settlement that was supposed to be a few billion dollars quickly ballooned to more than $20 billion."
Wyeth, the company behind the lethal diet drug combination, settled without considering the universe of possible claimants. The multibillion dollar global settlement only encouraged more plaintiffs to come forward with claims, many of them fraudulent. If Merck's handling of the Vioxx litigation stands as a model for containing such cases, the fen-phen situation serves as a cautionary tale.
"It was just blood in the water for the piranhas," Frank says. "Settling as early as they did and signaling they were willing to settle as early as they did really opened things up. ... Unless the claims are very clearly bound at an early stage, you have to fight it."
The provisions of the settlement itself also aim to avoid a Wyeth scenario. In the fen-phen settlement, Wyeth failed to adequately protect itself from weak or fraudulent claims. It had a broad system of analyzing claims that relied on auditing a randomly chosen 15 percent of the class. This encouraged even more plaintiffs to come forward.
Key to the Vioxx resolution agreement was the provision that each claim would be examined individually so that only the deserving claimants can win damages. "That was consistent with our litigation strategy from the beginning," Jarrell says.
It was a strategy that Wall Street deemed a victory.
After Merck announced the Nov. 9 settlement, its stock rose more than 2 percent in a down market. A few years ago analysts were predicting the Vioxx fiasco would cost Merck $10 billion to $25 billion. Following the settlement, CNN reported some estimates had been as high as $50 billion.
Even factoring in the almost $2 billion it spent defending itself in the past few years, there's no question that Merck defied expectations.
"Merck's legal strategy was as successful as it could have been," Frank says. "To defend itself against all of those claims would have cost far more than the billions they're laying out for this settlement. Even if they had won every case, it would have cost this much."
Perhaps not surprisingly, Christopher Seeger, co-counsel on the Vioxx Negotiating Committee and founding member of Seeger Weiss, is hesitant to laud Merck's legal strategy. "They're getting a lot of credit for a strategy they didn't really implement," he says. "They put up a tough front, it was a hard-fought battle and we met every challenge and managed to win a few cases along the way."
But not enough cases.
"Merck brought home to plaintiffs' lawyers that these cases are going to be hard to win," Nagareda says. "That has a big effect on the ultimate price tag of any settlement."