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Purdue Pharma, in opting for bankruptcy, says global settlement of opioid litigation is impossible

Federal Court

By Daniel Fisher | Sep 16, 2019


WHITE PLAINS, N.Y. (Legal Newsline) - Purdue Pharma has filed for bankruptcy protection, as expected, setting off an expensive process the company says is the only way to “bring order to the unrelenting chaos” of “piecemeal litigation” against it.

In filings with the U.S. Bankruptcy Court in White Plains, N.Y., the OxyContin manufacturer said despite having won the first two lawsuits taken to judgment against it – defense victories in North Dakota and Connecticut – it will be driven into insolvency unless it obtains a stay of more than 2,600 lawsuits against it and the new cases that are filed nearly every day. Purdue said it has spent $63 million on litigation so far this year and legal expenses are running more than $2 million a week.

Purdue has been preparing for Chapter 11 bankruptcy since last year and the filing comes less than a month before the first bellwether trial of multidistrict litigation concentrated in federal court in Ohio. Purdue said it will immediately seek an injunction halting all the litigation against it. To do so, it must convince the court to override bankruptcy rules allowing governmental entities to pursue claims under their police and regulatory powers.

If Purdue doesn’t get the stay, it said, “the hundreds of millions of dollars in annual legal fees that would otherwise be available to help address opioid overdoses will have been lost.” 

Over months of negotiations with private lawyers representing cities and counties as well as state attorneys general, the company told the court, Purdue has learned “that achieving a truly global consensual resolution of mass tort litigation” on this scale is “not achievable.” Bankruptcy is “the only forum that provides a collective process that ensure equal treatment of similarly situated claimants” and finality for the company.

In filing for bankruptcy protection, Purdue follows a well-worn path of other companies beset with mass-tort litigation, especially manufacturers of asbestos-containing products. The main advantage for the company a single judge must determine the value of competing claims for corporate assets in what is called an estimation proceeding.

“Outside of bankruptcy, claims are individually litigated,” said Garland Cassada, a lawyer who has represented numerous asbestos companies including Garlock Sealing Technologies, which won a significant reduction in the value of asbestos claims in bankruptcy court. “In bankruptcy, all the claims are consolidated in one court.”

If Purdue wins a stay, it isn’t necessarily bad news for the private lawyers representing governmental entities and some states under contingency fee contracts. Purdue has already negotiated an asbestos-like bankruptcy structure under which the controlling Sackler family would turn over its equity in the company along with more than $3 billion over seven years, into a public trust that would run Purdue going forward. 

Plaintiff lawyers usually set up these trusts, including establishing a claims process that typically works more rapidly than normal litigation and provides them a steady flow of fees.

“At the end of the day, it’s about the same or even better,” for plaintiff lawyers, Cassada said.

In its initial filings with the bankruptcy court, Purdue said it has $1.36 billion in cash and virtually no debt, with equity of $1.4 billion. The company’s value may be declining, regardless of litigation: Opioid-related revenue fell from $2.1 billion in 2010 to $975 million last year.

Still, Purdue suggested the 700-employee company is worth more alive than dead. It has a $2.35 million weekly payroll, makes $1.25 million a month in matching contributions to employee 401(k) retirement plans and pays more than $2.5 million a year in taxes in Connecticut, Rhode Island and North Carolina. It also pays $8 million  ayear in federal branded prescription drug fees and $3.9 million to New York for a new opioid excise tax. 

Multiple states have sued the Sacklers personally, claiming they siphoned billions of dollars in dividends out of the company that should be available to claimants. Proving fraudulent transfers could be tough, however. Some states have statutes of limitations as short as four years, including Delaware, where the two Sackler family trusts that own Purdue are located. And while there have been exceptions, most courts require evidence a company was insolvent when the transfers occurred. 

The Sacklers are likely to argue they settled claims brought by state and federal regulators in 2007, paying more than $200 million in fines, and operated under the oversight of the U.S. Health and Human Services Administration until 2013, casting doubt on claims the family should of known it was liable for billions of dollars in opioid-related claim at that time.

Purdue said the proposed settlement in bankruptcy has been approved by 24 state attorneys general and their counterparts in five U.S. territories, plus the lead counsel for the MDL plaintiffs in federal court in Ohio. That still leaves as many as half the states and numerous other plaintiffs such as union health plans and regional hospital administrations that the company says must be brought into its reorganization plan.

Purdue said it hopes the holdout states join the negotiations, “but if those parties insist on continuing to try to push to the front of the line and pursue their own claims to the detriment of all, decades of experience have demonstrated that bankruptcy is a proven and efficient vehicle to successfully, rationally, and equitably resolve these issues.”

The $270 million settlement Purdue reached in Oklahoma’s lawsuit exemplifies the problem, the company said. “Far from reflecting any fair notion” of Purdue’s liability, the company said, it “was instead driven in large measure by Oklahoma’s first-mover advantage.” And right after it was negotiated a number of Oklahoma municipalities criticized it as unfair, illustrating the impossibility of settling these claims outside of bankruptcy court.

As part of the reorganization process, Purdue asked the court to allow it to continue covering the legal costs of present and former employees. Under a limited partnership agreement last amended in June, Purdue pays the legal costs of current and former officers and directors, although the company halted payments to the Sackler family on March 1.

The company estimated the cost of indemnification at $1.5 million a month. More than 270 present and former employees, including many laid-off sales representatives, are named as witnesses or defendants and if their legal bills aren’t paid, Purdue said, it may “judicially prejudice” the company in the litigation and hurt its efforts to reorganize.

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