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C L A S S A C T I O N R E P O R T E R
Wednesday, October 25, 2000, Vol. 2, No. 208
Headlines
AT&T: Preliminary Rulings In Cash Balance Lawsuit Favor Employees
CABLE TV: Treasure Coast Subscribers Treated to Movies If Overcharged
COPPER MOUNTAIN: Wolf Haldenstein Files Securities Suit in California
CREDIT STORE: Settles 3 Suits over Credit Card Account Opening
CREDIT STORE: Settles Lawsuit over Mailers for Debt Collection
EICHEN: 9th Circuit Clears Way for Unnamed Objectors of Attorney Fees
GEORGIA PACIFIC: Retirees Gain Reversal on Calculation Of Distribution
HMOs: CT Vows to Appeal for Standing to Sue for Coverage for Enrollees
LASER EYE: As Surgery Spreads, So Do Lawsuits over Outcomes
LEHMAN BROTHERS: Faces FL Lawsuit over Underwriting of IPO Securities
L.F. ROTHSCHILD: Bank Gains Dismissal Of Fiduciary Duty Suit in S.D.N.Y.
MICROSTRATEGY INCORPORATED: Reaches Deal to Settle Securities Suit in VA
PROPOSED CASINO: Stand up for CA Asks for Legal Status of Land
RAMP NETWORKS: Stull, Stull Files Securities Suit in California
ROYAL BANK: Pensioners in Canada Launch Suit Claiming "Mismanagement"
SAGENT TECHNOLOGY: Pittsburgh Law Firm Files Securities Suit in CA
TOBACCO LITIGATION: B&W Says Oklahoma Fed Court Dismisses Suit
TV NETWORKS: Age Discrimination Is the Subject in Scribes' Suit
* 3 EEOC Lawsuits Show ADA Related Pitfalls at 3 Stages for Employers
* NJLJ Presents Review on Price Controls for Prescription Drugs
*********
AT&T: Preliminary Rulings In Cash Balance Lawsuit Favor Employees
-----------------------------------------------------------------
An ongoing lawsuit involving AT&T's cash balance plan has produced a
series of rulings on procedural motions that, overall, favor the
plaintiff-employees. The case, a class action lawsuit filed in the US
District Court for the District of New Jersey, is Engers v. AT&T. The
court has allowed the employees' claim that the cash balance plan
violated ERISA and the ADEA because it reduced the rate of benefit
accrual based on age.
An ongoing lawsuit involving AT&T's cash balance plan has produced a
series of rulings on procedural motions that, overall, favor the
plaintiff-employees. The case, a class action lawsuit filed in the U.S.
District Court for the District of New Jersey, is Engers v. AT&T (No.
98-CV3660).
AT&T implemented its cash balance plan in January 1998, affecting more
than 50,000 employees. Thus far, the court has ruled that there was no
deliberate violation of the Age Discrimination in Employment Act on the
part of AT&T and that the company did not violate ERISA Sec. 510, which
prohibits an employer from interfering with employees' attainment of
rights to benefits.
However, the court has allowed employees' claim that the cash balance
plan violated both ERISA and the ADEA because it reduced the rate of
benefit accrual based on age. The court also rejected two AT&T motions to
dismiss on procedural grounds. Perhaps the most serious claim made by
employees is the allegation that AT&T had distributed misleading summary
plan descriptions that masked the benefit reductions. The court also
denied AT&T's motion to dismiss that claim. (Employee Benefit Plan
Review, September, 2000)
CABLE TV: Treasure Coast Subscribers Treated to Movies If Overcharged
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Cable TV watchers take note: If you are a former subscriber to TCI
Cablevision of the Treasure Coast and were charged a late, administrative
or processing fee of $5 or more in the last four years, you may be
treated to the movies.
A uniform settlement of class action suits in 14 states - including
Florida - would give current customers who have paid such fees a "product
certificate" good for two pay-per-view movies.
The class action, consolidated into one Indiana case, claims that TCI's
late fees were "unlawful, excessive or unreasonable."
The merits of the case have not been tried, but the Indiana Superior
Court in Martinsville will hold a hearing Dec. 18 to decide if the
proposed settlement is reasonable and fair to the class.
The proposed settlement would allow members of the class who lack the
ability to receive pay-per-view to opt instead for one month of HBO,
Showtime or Cinemax or three months of Starz and Encore, according to the
class notice circulated recently.
Class members who need a converter box will receive free use of one for
two months. Those who lack the ability to receive pay-per-view and who
already subscribe to all the premium channels will receive a check for
$6.95 or a $6.95 credit on any balance due on their current cable
television bill. Residential cable TV subscribers in Indian River and St.
Lucie counties received the notice, which also went to 39 other
communities in Florida.
The mailing follows up on a half-page notice run Aug. 6 in the Press
Journal and includes a later hearing date because there was a problem
with the first Florida mailing, an AT&T Broadband spokesman in Colorado
said. Moving the hearing date a couple months gives Floridians enough
time to object if they want to, he said.
TCI Cablevision merged in August 1999 with AT&T and is part of AT&T
Broadband. Local officials declined Monday to comment on the proposed
settlement. If the settlement is approved, the cable company will be
ordered to reduce 30-day late fees to $2.95. Another $2 could be added to
accounts unpaid after 45 days. The company also could charge a single fee
of $4.95 on accounts 45-days overdue. The cable company also would pay
plaintiffs' attorneys fees in the multi-state action up to a maximum of
$6 million and reasonable and necessary costs incurred on behalf of the
class up to a maximum of $480,000.
Objections to the terms of the settlement must be filed by Nov. 28 with
the Clerk, Morgan Superior Court No. 1, P.O. Box 1556, Martinsville,
Ind., 46151 and also mailed to the class counsel, DiTommaso & Associates,
1315 W. 22nd St., Oak Brook, Ill. 60523. (Press Journal (Vero Beach, FL),
October 24, 2000)
COPPER MOUNTAIN: Wolf Haldenstein Files Securities Suit in California
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Wolf Haldenstein Adler Freeman & Herz LLP commenced a class action
lawsuit in the United States District Court for the Northern District of
California, on behalf of purchasers of the securities of Copper Mountain
Networks (NASDAQ:CMTN - news) between April 18, 2000 and October 17,
2000, inclusive. A copy of the complaint filed in this action is
available from the Court, or can be viewed on the Wolf Haldenstein
website at www.whafh.com.
As detailed in the Complaint, defendants issued false and misleading
statements concerning Copper Mountain's financial well- being and future
prospects. Defendants also issued false statements indicating that the
Company's market was growing, when, in fact, it was declining at a rapid
pace.
On October 17, 2000, after the close of the market, the Company disclosed
that its customers were experiencing a serious financial slowdown and
were thus unable to obtain the necessary financing to purchase the
Company's products. These negative disclosures were in stark contrast to
the positive statements issued by the Company during the Class Period.
When the true state of Copper Mountain's fiscal condition was disclosed,
the market immediately reacted.
One day after the truth was revealed, the Company's common stock dropped
$17 per share, or 63%, from $26.875 per share to $9.875 per share on a
volume of 23 million shares. In just one day, Copper Mountain suffered a
market capitalization loss in excess of $867 million. This is in sharp
contrast to Copper Mountain's trading price during the Class Period which
reached over $125 per share on July 17, 2000 - a Class Period high.
Contact: Wolf Haldenstein Adler Freeman & Herz LLP, New York 800/575-0735
Fred Taylor Isquith, Esq. Gregory M. Nespole Gnespole@aol.com
nespole@whafh.com Michael Miske classmember@whafh.com whafh@aol.com
www.whafh.com
CREDIT STORE: Settles 3 Suits over Credit Card Account Opening
--------------------------------------------------------------
On July 7, 2000, Credit Store Inc. entered into a Settlement Agreement to
resolve, without admitting any liability or wrongdoing, three class
action lawsuits brought on behalf of persons solicited by the Company to
open credit card accounts and voluntarily to repay debt that had been
discharged in Bankruptcy. The three class actions subject to the
settlement agreement are Apostol, as Administrator for the Estate of
Curtis Kim v. M. Reza Fayazi, et al., McGlynn v. The Credit Store, Inc.,
et al., and Le v. The Credit Store, Inc., et al. The Court in these
actions has granted its preliminary approval of the Settlement Agreement.
Upon final approval by the Court of the Settlement Agreement, the Company
will be obligated to pay $370,000 plus the costs of mailing and
publication. Of this settlement amount, the Company anticipates that its
insurance will cover $230,000 plus the costs of mailing and publication.
CREDIT STORE: Settles Lawsuit over Mailers for Debt Collection
--------------------------------------------------------------
The Company entered into a Settlement Agreement to resolve, without
admitting any liability or wrongdoing, Sturm v. Bank of New York, et.
al., a class action alleging violation of the Fair Debt Collection
Practices Act and state law in connection with mailers sent to
prospective customers whose debt was out-of-statute. The Court in this
action signed the Stipulation of Dismissal on August 23, 2000. The
Company paid a total of $6,750 in the settlement.
EICHEN: 9th Circuit Clears Way for Unnamed Objectors of Attorney Fees
---------------------------------------------------------------------
Judges approving class action attorneys fees awards must clearly define
their reasons should they depart from the benchmark, the Ninth Circuit
U.S. Court of Appeals ruled.
The three-judge panel's ruling also allows unnamed class-member objectors
to appeal fee awards without going through a more cumbersome process of
intervening in the suit as a named party.
"Assuring fair and adequate fee awards outweighs the danger that allowing
appeals by non-intervening unnamed parties will complicate the settlement
process," wrote Judge Kim Wardlaw. She was joined by Thomas Nelson and
Alex Kozinski.
The ruling in Powers v. Eichen, 00 C.D.O.S. 8486, not only gave objectors
standing to appeal, but also provided a survey of governing law and
appropriate practices for judges meting out fee awards.
The fee award challenge was brought by Wilfred George, a stockholder of
Proxima Corp. When the company settled stock fraud litigation marshaled
by Milberg Weiss Hynes Bershad & Lerach, notices sent to class members
gave them an opportunity to object to attorneys fees totaling 30 percent
of the settlement.
The benchmark in such cases is 25 percent.
George was represented by Berkeley solo Lawrence Schonbrun, a frequent
critic of large class action fee awards.
Schonbrun attacked the award, alleging that it was too large; that the
judge didn't explain why he chose the percentage method rather than the
lodestar method of calculating fees; and for basing the award on a gross
rather than net recovery.
The Ninth Circuit agreed U.S. District Judge Rudi Brewster should have
fully explained why he'd approved the larger-than-normal award and
remanded the case to the Southern District for the judge to further
explain his reasons. It did so despite quoting at length Brewster's
from-the-bench ruminations on the complications of securities cases as he
mulled the fee request. "Many of the factors discussed at the hearing may
have supported the fee award, but the district court never stated the
ground on which it ultimately relied," Wardlaw wrote.
Schonbrun said he was happy with the decision. "I think the Ninth Circuit
was positively telling judges, 'Don't just sign a form that the class
action lawyers put in front of you,'^" Schonbrun said.
The attorney who argued the case for Milberg Weiss could not be reached,
but another member of the plaintiffs bar had a different take on
Schonbrun's win.
"A Pyrrhic victory, at best," said Solomon Cera of Gold Bennett Cera &
Sidener, who predicted the fee award would remain intact. "If you're
someone in Schonbrun's position and you want to object to a fee award,
you have to do it right," Cera said. "That's all they're saying."
The dispute in this case was over a relatively small amount of money for
securities cases -- a few hundred thousand dollars, or the difference
between a 25 percent and 30 percent fee award.
Judge Brewster seemed swayed that Milberg Weiss had taken the case on a
contingency basis. "It's one thing to charge a rate that's going to be
paid," Brewster said while considering the fee request. "You can go to
the bank with it. But it's another thing to work long hours, hoping that
someday they're going to win because, if they win, they're going to get
paid handsomely, and if they lose, they just soak it up." But in his
final order, Brewster stated simply that the award was "fair and
reasonable under the 'percentage of recovery' method." (The Recorder,
October 23, 2000)
GEORGIA PACIFIC: Retirees Gain Reversal on Calculation Of Distribution
----------------------------------------------------------------------
Participants in the Georgia Pacific Corp. salaried employees retirement
plan will have a second chance to have a federal district court hear
their argument that the plan's method of calculating pre-retirement
lump-sum cash distributions violated ERISA by failing to incorporate
Treasury Regulation @ 1.311(a)-11 in its calculations. Lyons et al. v.
Georgia Pacific Corporation Salaried Employees Retirement Plan, No.
99-1064 0 (11th Cir., Aug. 11, 2000).
The U.S. Court of Appeals for the 11th Circuit reversed a decision in
favor of the Georgia Pacific plan, finding that Treasury Regulation @
1.411(a)-11 was a reasonable and valid interpretation of the Employee
Retirement Income Security Act Section 203(e). Section 1.411(a)-11, the
appellate court said, clearly provides that discount interest rates
prescribed by ERISA Section 203(e) apply to consensual, as well as
non-consensual, lump-sum distributions.
The circuit court held that the regulation as applied required that
participants' lump-sum distributions be calculated by (1) determining the
normal retirement benefit had the participant not elected to take an
early lump- sum distribution and (2) then discounting that amount to
present value using the rate prescribed in Section 203(e).
The pension plan in this action is a defined benefit plan, one in which
the retirement benefit is expressed as a certain annual amount to be paid
by the employer over the employee's lifetime, beginning at the employee's
retirement date. The calculation of benefits with this type of plan is
not dependent upon investment gains or losses. Therefore, the benefit
calculation is credited by the employer with hypothetical allocations and
hypothetical interest earnings determined by a formula established within
the plan.
Lead plaintiff in this class action, Jerry L. Lyons, was entitled to a
vested benefit when he left Georgia Pacific because he had been with the
company and its predecessor, Great Northern Corp., for at least five
years. However, Lyons contested the amount of his lump-sum payment,
following consultation with the National Center for Retirement Benefits,
claiming that he received "substantially less" than the amount he was
entitled to under ERISA Section 203(e).
In its initial summary judgment argument, Georgia Pacific contended that
the interest rate restrictions established in Section 203(e) apply
exclusively to involuntary lump-sum distributions of $3,500 or less. The
statute was inapplicable because Lyons and others involved in the class
action received a voluntary lump-sum distribution of more than that
amount. The district court granted Georgia Pacific's motion for summary
judgment. It held that the interest rate provisions contained in Section
203(e) apply only for the determination of a participant's consent to the
distribution of a lump sum; there exists no legislative authority in
either the language of the statute or elsewhere requiring lump-sum
distributions to be computed in accordance with those provisions. The
district court found Treasury Regulation @ 1.411(a)-11 an unreasonable
construction of Section 203(e).
However, the federal district court, ruling in the appeal, found that the
aforementioned Treasury Regulation a reasonable and valid interpretation
of Section 203(e), as it existed prior to its amendment by the Retirement
Protection Act of 1994, at least as that provision applies to defined
benefit cash balance plans with fixed interest credit rates.
Representing Lyons was Eva T. Cantarella of Hertz, Schram & Saretsky in
Bloomfield Hills, Mich.
Georgia Pacific was represented by Gregory C. Braden, Peter Q. Bassett
and Jason Nicholas Poulos of Alston & Bird in Atlanta. (Pension Fund
Litigation Reporter, September 2000)
HMOs: CT Vows to Appeal for Standing to Sue for Coverage for Enrollees
----------------------------------------------------------------------
Connecticut Attorney General Richard Blumenthal has vowed to appeal a
ruling by a federal judge that states have no standing to sue HMOs for
denying coverage to enrollees, because the language of the federal
Employee Retirement Income Security Act clearly bars such actions. State
of Connecticut v. Physicians Health Services, No. 00-7986 (D. Conn., July
13, 2000).
Blumenthal had filed a class-action suit against Physicians Health
Services on behalf of eight enrollees alleging that the HMO has denied
coverage for specific prescription drugs, and pressured doctors and
patients to accept cheaper versions of the drugs. The suit alleged that
the generic versions are not as safe and effective as the brand name
drugs.
The state brought suit under the doctrine of parens patriae, the
common-law principle that a state may bring actions on behalf of state
residents and may recover on their behalf.
U.S. District Judge Stephen Underhill granted PHS' motion to dismiss the
suit because he held that Congress did not grant states standing to sue
under ERISA. The language of the act limits persons authorized to bring
an ERISA civil enforcement action to either participants, beneficiaries
or fiduciaries or an employer-provided benefit plan, the court said,
ruling that the state of Connecticut did not meet any of those criteria.
"The state attorney general's interest cannot overcome the specific and
focussed preemptive scope of ERISA," he said. "Permitting parens patriae
standing would permit an end run around the ERISA preemption clause."
The court noted that if the allegations in the complaint were true, the
eight HMO enrollees appear to have "very legitimate and serious concerns
that could form the basis of a valid lawsuit." The problem, Judge
Underhill said, "is with the identity of the party who has attempted to
bring those claims on their behalf in this case."
Blumenthal said that the court "recognizes the harm done by HMOs, but
mistakenly denies the state a means to correct it. Our precedent-setting
lawsuit against HMO abuses and illegalities will continue, so that we can
stop this interference with the health care patients need and deserve."
The state was represented by Charles C. Hulin of the attorney general's
office in Hartford, Conn.
Stephanie W. Kanwit of Epstein, Becker & Green in Washington, D.C.,
represented PHS. (Pension Fund Litigation Reporter, September 2000)
LASER EYE: As Surgery Spreads, So Do Lawsuits over Outcomes
-----------------------------------------------------------
Call it the hidden side of the Lasik juggernaut: A patient who suffers
sight-threatening complications after laser eye surgery, a center that
engages in what one couple regards as "bait and switch" tactics, and
several California surgeons who reused disposable blades without
sterilizing them between patients.
The popularity of laser eye surgery to treat nearsightedness, and the
heated price wars spawned by competition, have resulted in burgeoning
numbers of patients reporting what some ophthalmologists say are
preventable--and in some cases serious--complications. As a result, some
experienced laser surgeons are developing a new subspecialty: treating
patients with Lasik-related complications.
One of the busiest of this new fraternity is Roy Rubinfeld, a Chevy Chase
surgeon who is director of training for TLC, one of the area's busiest
and most expensive laser centers, and a competitor of Lasik discounters.
Rubinfeld estimates that he has seen more than 100 Lasik patients with
problems in the past 18 months, most of them referred to him by other
doctors.
"Some of it's the result of surgeons with bad judgment, some of it's
inexperienced surgeons, and some of it is patients who haven't been
educated preoperatively so they know what to expect," Rubinfeld said.
While most of these patients underwent surgery in the Washington area,
Rubinfeld said he has seen patients who have flown in from Europe, South
Africa and South America. "For a while the pace was terrifying. One day I
saw six patients who were disasters."
Among the patients Rubinfeld is treating is Mitchell Levy, a Potomac
business owner who underwent Lasik in September 1999 at Millennium Laser
Eye Center in Tysons Corner. Levy, who has filed a lawsuit against the
center, his surgeon and an optometrist, did not know until after his
surgery that he suffered from keratoconus, a serious condition that
causes the cornea to bulge and thin, according to Aaron Levine, one of
his attorneys.
Keratoconus is detectable by corneal topography, a procedure that maps
the cornea before laser surgery. Patients with keratoconus are told not
to have Lasik because the surgery further weakens the cornea. "It's an
absolute contraindication," said James Salz, a clinical professor of
ophthalmology at the University of Southern California.
According to Levine, surgeon Andrew Holzman and optometrist Robert Samit,
Millennium's owner, detected possible keratoconus before surgery but
decided to proceed anyway. Levine said that Levy is now legally blind,
unable to see well enough to drive or to read a newspaper. He is
scheduled to undergo a double corneal transplant in January, Rubinfeld
said.
Thomas Hogan, the attorney for Holzman, Samit and Millennium, declined
comment on the lawsuit, which is scheduled for trial Nov. 6 in Fairfax
County Circuit Court. In court papers the defendants denied wrongdoing
and alleged that any injuries Levy suffered were caused by his "sole or
contributory negligence."
Carol Wood of McLean said she had a much less serious problem with Lasik
but believes she experienced a "bait and switch."
Wood said she and her husband were drawn to a discount center by ads
claiming the center was staffed by experienced doctors who had performed
thousands of procedures. They were told, Wood said, that one of these
doctors would perform their surgery. But when the Woods arrived for
surgery, they discovered it would be performed by a less experienced
doctor who told Wood he had "participated in thousands of procedures."
Wood said she never complained about the substitution, but was upset by
it.
Wood said her husband got "great results" but that her surgery had to be
aborted because of a problem. She recently underwent Lasik performed by
another surgeon who was recommended by her ophthalmologist.
To Salz, some of the Lasik-related problems he and his colleagues see may
be a consequence of less than rigorous selection of patients spawned by
competition among centers.
"Look at it this way," said Salz, director of refractive surgery research
at Cedars-Sinai Medical Center in Los Angeles. "A full-page ad in the
L.A. Times costs $ 60,000, and a lot of these centers advertise
regularly. You can imagine how many cases these discount places need to
do" to recoup that cost.
Lasik has even resulted in a class action lawsuit on behalf of nearly
3,000 patients that is awaiting the approval of a settlement by a
California Superior Court judge in San Francisco.
The case involves a husband-and-wife team of ophthalmologists, Sanjay
Bansal and Swati Singh, owners of LaserVue Eye Center, a chain of four
clinics in the San Francisco area. For several years, Bansal, Singh and
other doctors at two LaserVue centers rinsed and reused disposable blades
and failed to sterilize other equipment between patients, according to
court papers.
Reusing disposable blades potentially exposed patients to AIDS,
hepatitis, staphylococcus and other infections, the lawsuit contends, and
is a violation of standard medical practice and state law.
The class action suit, filed by several patients of LaserVue, alleges
that the couple "willfully and recklessly used unclean blades . . . in an
attempt to maximize their profits."
Last March the California Department of Health, after consulting with the
federal Centers for Disease Control and Prevention, required LaserVue to
notify all patients of the risk of exposure to infection from the
practice, a risk the department said was small. The practice was halted
in June, a month before the lawsuit was filed. The California Medical
Board is conducting an investigation.
The proposed settlement, according to Geoffrey Gordon-Creed, the lawyer
who filed the lawsuit, would require the doctors to pay each patient $
500, which could be used for blood tests for HIV, hepatitis and other
diseases. Gordon-Creed said no patients have come forward and said they
contracted an infection as a result of the practice.
Fletcher Alford, an attorney for Bansal and Singh, denied that his
clients reused blades and other disposable equipment to make more money,
but did so to give patients the best care possible. Alford said the
couple changed blades after every other patient and reused blades only
when there was no visible bleeding. He noted that no patients have
alleged they had been physically harmed by the practice.
"The results speak for themselves," said Alford. "Dr. Bansal made a
reasonable medical judgment" by reusing a "quality blade that had worked
well in the past." --Sandra G. Boodman (The Washington Post, October 24,
2000)
LEHMAN BROTHERS: Faces FL Lawsuit over Underwriting of IPO Securities
---------------------------------------------------------------------
On August 3, 2000, a class action was filed in the United States District
Court for the Southern District of Florida against 18 underwriters of IPO
securities, including LBI. Plaintiffs seek compensatory and injunctive
relief for alleged violations of the antitrust laws based on the theory
that the defendant underwriters fixed and maintained fees for
underwriting certain IPO securities at supra-competitive levels. On
October 2, 2000, LBI and the other defendants jointly moved to transfer
this action to the Southern District of New York, where the Gillet case
(see above) is pending, and to stay all proceedings in the Southern
District of Florida pending the Court's resolution of the motion to
transfer.
L.F. ROTHSCHILD: Bank Gains Dismissal Of Fiduciary Duty Suit in S.D.N.Y.
------------------------------------------------------------------------
Ruling that the fiduciary duty of Morgan Guaranty Trust Co. of New York
as an indenture trustee ended when the trust indenture terminated, the
Southern District of New York has dismissed claims brought against the
bank by group of debenture holders. The holders sued on the grounds that
Morgan failed to protect their rights in connection with a receivership
imposed on a financial institution that merged with the original issuer
of the debentures. Philip et al. v. L.F. Rothschild & Company Inc. et
al., No. 90 Civ. 0708 (WHP) (S.D.N.Y., Sept. 5, 2000).
In 1986, L.F. Rothschild, Unterberg, Tobin Holdings Inc., later known as
L.F. Rothschild Holdings Inc. (Holdings), sold 7 percent convertible
subordinated debentures. The debentures were sold pursuant to an
indenture agreement with Morgan Guaranty Trust Co. of New York. The
indenture agreement provided that Morgan would serve as trustee for
holders of the debentures and that it would notify the holders in the
event of default. Morgan was also responsible for demanding payment and
bringing suit against Holdings if payment was not issued. Morgan was also
to file a proof of claim on behalf of all debenture holders in the event
that Holdings filed for bankruptcy.
Holdings began to suffer financial losses in 1986. The next year it
became a subsidiary of Franklin Financial Services Inc., following a
merger. A supplemental indenture was executed in June 1988 and the
post-merger Holdings assumed the obligations of the 1986 indenture.
Holdings then defaulted on interest payments, and Morgan notified all of
the debenture holders. Holdings subsequently filed for Chapter 11
bankruptcy in June 1989, seeking to reorganize. Morgan acted as a member
of the official committee of unsecured creditors during the bankruptcy
proceedings.
Several months later a group of debenture holders sued L.F. Rothschild &
Co. Inc., a subsidiary of Holdings; Franklin Financial and its parent;
Franklin Savings Association; Morgan; and several others in U.S. District
Court for the Southern District of New York. The putative class action
alleged that Franklin Financial and Franklin Savings failed to give
Holdings $55 million in promised financing, and it also alleged that
Morgan breached its fiduciary duty by failing to perform adequate due
diligence concerning Holding's merger with the Franklin defendants.
Morgan also acted with gross negligence or recklessness as a member of
the committee of unsecured creditors, the plaintiffs claimed.
Several days after the suit was filed the Resolution Trust Corporation
became the conservator of Franklin Savings. The RTC later became the
bank's receiver. In January 1991, L.F. Rothschild & Co. filed for
bankruptcy and its case was consolidated with that of Holdings. The
class-action suit was then placed on suspended status pending resolution
of the bankruptcies.
In 1992, the bankruptcy court confirmed a reorganization plan for
Holdings, which rejected the indenture. The confirmation order stated
that the indenture would remain in effect for a short time so the
indenture trustee could distribute funds to the debenture holders.
The plaintiffs appealed the confirmation of the plan to the district
court unsuccessfully, arguing that Morgan should not have been released
from liability for its conduct as a member of the committee of unsecured
creditors. They did not challenge the rejection of the indenture, nor did
they seek to stay the effectiveness of the plan.
In 1997, the district court removed the class action from the suspense
docket and a second amended complaint was filed. The plaintiffs added
assertions that Morgan breached the indenture and its fiduciary duties by
failing to take certain actions in response to the Franklin Savings
receivership. The plaintiffs argued that Morgan failed to:
-- protect their rights;
-- provide timely notice that a receiver had been appointed and that
claims needed to be filed with the receiver;
-- inform them of remedies and claim deadlines under the Financial
Institutions Reform, Recovery and Enforcement Act of 1989; and
-- protect and prosecute their rights as debenture holders against
the Franklin defendants.
The plaintiffs' claims against Morgan concerned Morgan's alleged acts or
omissions on or after July 17, 1992, the date on which the RTC was
appointed receiver of Franklin Savings. Morgan argued that by that date,
the indenture had terminated and its fiduciary duties had ended as well.
Morgan stated that it could not be held liable for an alleged breach of
duties that it no longer had. Morgan moved to dismiss the amended
complaint against it, and the plaintiffs requested certification as a
class.
U.S. District Judge William H. Pauley III issued a ruling on the motions
on Sept. 5, 2000. The judge explained that the pre-default duties of an
indenture trustee are limited to those specified in the indenture. In the
post-default context, the indenture trustee assumes broader fiduciary
duties to act on behalf of the debenture holders, he continued. However,
the fiduciary duties arise from and are limited by the indenture
agreement and they end when the indenture terminates, he said.
Once the holders began turning in their debentures for payment under the
reorganization plan, there was no trust indenture for Morgan to
administer, Judge Pauley said. The plan noted this, the judge observed,
pointing to language stating that the indenture would continue for the
limited purpose of allowing distributions. The consummation of the plan
was the controlling event for purposes of deciding when Morgan's
fiduciary duties under the indenture terminated, he elaborated.
Morgan's motion to for summary judgment was granted and the claims were
dismissed. Judge Pauley concluded by stating that the motion for class
certification was moot because the plaintiffs had stipulated to settling
their claims against the remaining defendants. (Bank & Lender Liability
Litigation Reporter, September 21, 2000)
MICROSTRATEGY INCORPORATED: Reaches Deal to Settle Securities Suit in VA
------------------------------------------------------------------------
MicroStrategy(R) Incorporated (Nasdaq: MSTR) announced on October 24 that
it has reached agreements to settle two lawsuits filed against the
Company and certain of its officers and directors relating to the
Company's restatement of financial results for 1997, 1998, and 1999. The
first settlement agreement relates to the consolidated securities class
action lawsuit filed in the United States District Court for the Eastern
District of Virginia. The second settlement agreement relates to the
shareholder derivative lawsuit filed in the Delaware Court of Chancery.
Both settlements are subject to confirmatory discovery, final
documentation, and court approval.
Under the class action settlement agreement, class members will receive:
(1) five-year unsecured promissory notes issued by MicroStrategy having
an aggregate principal amount of $80.5 million, bearing interest at 7.5%
per year; (2) 550,000 shares of MicroStrategy Class A Common Stock, with
the number of shares to be increased if the market value of the shares at
the time of the district court settlement hearing is less than $30 per
share, so that the guaranteed value of the shares is $16.5 million; and
(3) warrants issued by MicroStrategy to purchase 1.9 million shares of
MicroStrategy Class A Common Stock at an exercise price of $50 per share,
with the warrants expiring five years from the date they are issued.
MicroStrategy has the right, at any time, to prepay the promissory notes,
or to mandatorily convert the promissory notes into shares of
MicroStrategy Class A Common Stock at a conversion price equal to 80% of
the dollar weighted average trading price per share for all round lot
transactions in the stock on the Nasdaq National Market for the ten
trading days ending two days prior to the date that written notice of
conversion has been given. The warrants may be exercised for cash or by
tendering promissory notes valued for the purpose of warrant exercise at
133% of their principal amount plus accrued interest.
Under the derivative settlement agreement, MicroStrategy will add a new,
independent director with finance experience to the audit committee of
its board of directors and will ensure continued adherence with
applicable legal and regulatory requirements regarding the independence
of audit committee members and trading by insiders. In addition, certain
officers of MicroStrategy will contribute a portion of the 550,000 shares
of MicroStrategy Class A Common Stock that is to be issued to class
members in settlement of the class action lawsuit. Specifically, Michael
J. Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the class
action settlement Class A Common Stock with a total value of $10 million.
In connection with the settlements, the Company expects to receive a cash
payment of slightly more than $13 million from its insurance carriers.
PROPOSED CASINO: Stand up for CA Asks for Legal Status of Land
--------------------------------------------------------------
A group called Stand Up For California opposes a 160,000-square-foot
casino proposed by the Picayune Band of Chuckchansi Indians in the Madera
county foothills. The group claims the proposed development is illegal
because the site is not part of the reservation.
Stand Up For California sent a letter to the National Indian Gaming
Commission asking for reconsideration of the legal land status that would
allow gaming.
At the heart of the dispute seems to be status of the land on which the
proposed casino would sit. The opposition says the land in question
belongs to a disenrolled tribal member and the tribe is trying to use the
trust status of that land.
It further claims the land was acquired using money from the Department
of Housing and Urban Development and thus not eligible for gaming
enterprises. The group also says the land in question is in fee simple
status, meaning there are no restrictions on it that would designate the
area as tribal land.
John Peebles, attorney for the Picayune, says that this is not true. He
says bond were sold to raise money to acquire the land. He says that
Stand Up For California makes a mistake when it claims the land is in fee
simple status. He states flatly it is not.
The Picayune Band of Chuckchansi was among those re-recognized under the
Tillie-Hardwick class action suit that spelled out the terms of
recognition for several California tribes in the 1980s.
Stand Up For California says the sovereign area for the tribe is on two,
noncontiguous parcels of 28.7 acres and another that is 80 acres. It
claims the casino will be built on land contiguous to the smaller plot.
Peebles says the proposed development is indeed within the 80-acre
parcel. This is in the stipulation for judgment portion of the
Tillie-Hardwick Act, he said, and was signed off on by attorneys for both
Picayune and the United States government and approved by the federal
district court.
"The language in Tillie-Hardwick is basically a restatement of a
presidential proclamation made in 1912 by United States President William
Howard Taft," says Peebles who also says the office of the solicitor
determined the entire area is within Indian land.
Cheryl Schmit, co-director of Stand Up For California, says that
determination was made as a personal favor by the associate solicitor for
Indian affairs, Darrell Jordan, to a Monteau, Peebles' law partner.
Peebles said he thinks this is "ridiculous," adding there is "no way"
this is true and that Schmit has no evidence to back it up. He said he
thinks that the solicitor made the right decision. Peebles further said
he does not understand what legal grounds Stand Up for California has in
the matter. "All Darrell Jordan said was to reaffirm the case law put
down from Tillie-Hardwick,' says Creig Marcus, tribal director of
operations. He added that Madera County has been helpful to the tribe and
a few misconceptions needed to be cleared up. He said the casino will
provide extra services for the county such as public safety and fire
protection.
Schmit says her group does not oppose Indian sovereignty or Indian
gaming. She describes the group as a non-profit, grass-roots organization
that opposes expansion of gaming interests in California.
It supported the Pala compact signed with Gov. Gray Davis that spelled
out rules for gaming in California. A self-described "patriot," Schmit
says she opposes any kind of "race preference" in the United States.
Stand Up for California's Internet site shows the group opposed
California's propositions that legalized American Indian gaming in
California. Schmit notes her group supported Proposition 29, viewed by
many as a watered-down version of 1A that received, at best, a lukewarm
reception from most American Indian gaming advocates.
Cascade Entertainment, a Tiburon-based company has been hired by the
tribe to build and manage the casino for a five- to seven-year period.
Pat Minche, chief operating officer for Cascade, says his company
received phone calls that "have been running about 70 to 80 percent in
favor of the project." (Indian Country Today, October 24, 2000)
RAMP NETWORKS: Stull, Stull Files Securities Suit in California
---------------------------------------------------------------
Stull, Stull & Brody has filed a class action lawsuit in the United
States District Court for the Northern District of California on behalf
of purchasers of Ramp Networks Inc. ("Ramp" or the
"Company")(NASDAQ:RAMP) securities between November 15, 1999 and
September 29, 2000, inclusive (the "Class Period"), for violations of
federal securities laws. Defendants include Ramp and certain of its
officers and directors. The Complaint charges that defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10-b(5) by, among other things: misrepresenting the current and future
financial condition of Ramp and by issuing false and misleading
statements throughout the Class Period. Specifically, the complaint
alleges that during the Class Period Ramp knew, but did not disclose,
that its third quarter results would not meet expectations due to
operational problems at the Company.
Contact: Stull, Stull & Brody Timothy Burke, Esq., 888/388-4605
tburke@secfraud.com
ROYAL BANK: Pensioners in Canada Launch Suit Claiming "Mismanagement"
---------------------------------------------------------------------
A group of angry Royal Trust pensioners from across Canada has launched a
class action suit to assert their rights to a massive surplus in its
pension fund and to seek damages for what they claim were wrongful
actions by the Royal Bank (and previously Royal Trust) over the course of
a decade.
Former Royal Trust employees, representing an estimated 2,500 members of
the Royal Trust plan, filed a statement of claim on October 19, 2000
against Royal Trust and Royal Bank in the Superior Court of Justice in
Ontario.
Paul Starita is the spokesperson for the more than 200-strong group of
former Royal Trust employees spearheading the legal action - the
Association for Pension Enhancement at Royal Trust (APERT). He says the
group was forced to initiate the suit because the Royal Bank has refused
to meet and negotiate with the pensioners regarding their concerns. "The
Royal Bank has indicated to us that it is not prepared to do anything
unless we force them through the courts," notes Starita. The group does
not know the exact number of people affected, he says, "because we have
been unable to obtain this information and thus have not been able to
contact them all."
Starita, former President and Managing Partner of Royal Trust Investment
Services (later part of the Royal Bank), cites two key areas on which the
suit hinges. "First, we want the court to establish once and for all, our
rights to and ownership of our pension plan surplus -- ownership which we
believe to be very clear in all legal documents related to the pension
plan," he says. Starita estimates the surplus at over $150 million.
The second area relates to the overall management of the pension plan.
The lawsuit filed with the court states that Royal Trust and now Royal
Bank breached their fiduciary duties in at least 12 different ways. The
document filed in the court states that the defendant(s):
* failed to carry out the terms of the plan in the spirit in which
they were intended,
* failed to act impartially or fairly in exercising discretion, failed
to act in good faith,
* acted in their own interests in conflict with their duties,
* failed to carry out the express terms of the trust,
* made unlawful and adverse amendments to the plan,
* failed to provide notice of adverse amendments to the plan,
* have unlawfully claimed ownership of the surplus,
* reopened the plan or caused to have the plan reopened unlawfully,
* failed to act evenhandedly,
* failed to calculate and pay benefits for each year of pensionable
services based on the formula of 2% per year of pensionable service
when the plan could well afford to, and
* failed to significantly increase benefits and pay out part of the
surplus to beneficiaries notwithstanding that more than half the
assets held in the fund constitute surplus.
The action is also claiming punitive damages against Royal Trust and
Royal Bank for "oppressive, arbitrary and high-handed conduct." The group
is also seeking to notify all Royal Trust pension plan members of this
action and to invite them to phone the group's lawyers.
SAGENT TECHNOLOGY: Pittsburgh Law Firm Files Securities Suit in CA
------------------------------------------------------------------
A class action lawsuit has been filed in the United States District Court
for the Northern District of California on behalf of all persons who
purchased or otherwise acquired common stock of Sagent Technology Inc.
(Nasdaq: SGNT) between October 21, 1999 and April 18, 2000 (the "Class
Period").
The complaint alleges that beginning October 21, 1999, as part of
defendants' effort to boost the price of Sagent stock, they
misrepresented Sagent's true 1999 and 2000 prospects in an effort to
conceal Sagent's true prospects until they were able to sell at least $8
million of their own Sagent stock and were able to renew and/or expand
Sagent's credit line which was set to expire in early 2000. Renewing
Sagent's credit line was extremely important to defendants, as Sagent had
not been, and would not be able to, fund its operations from cash
generated by its business operations, because Sagent was continuing to
post substantial losses.
On April 18, 2000, after representing throughout late 1999 and early 2000
that Sagent would achieve Q1 results of $17.4 million in revenue and $.04
in EPS, defendants revealed that Sagent would fall seriously short of the
results theretofore promised by defendants. In fact, defendants were
forced to reveal that contrary to their representations of closing
Sagent's largest software deal ever and strong growth in revenue and EPS,
Sagent was, in fact, suffering revenue and EPS declines.
Contact: Alfred G. Yates Jr., Esq., 800-391-5164, or 412-391-5164, or
fax, 412-471-1033 or yateslaw@aol.com
TOBACCO LITIGATION: B&W Says Oklahoma Fed Court Dismisses Suit
--------------------------------------------------------------
A federal judge in Oklahoma has dismissed a class action lawsuit against
Brown & Williamson Tobacco Corporation and the other tobacco companies
brought on behalf of a statewide class of individual smokers.
"This case, known as Walls v. The American Tobacco Company, is the 12th
Federal Court case where class certification has been denied," Mitch
Neuhauser, a B&W attorney said. "In fact, every federal court to address
the matter in tobacco litigation has denied class certification. These
courts recognize that the issues surrounding each smoker's use of
cigarettes is unique making it unworkable to treat smokers as a class."
Brown & Williamson Tobacco Corporation, the nation's third-largest
tobacco manufacturer, is headquartered in Louisville, Ky. The company's
major brands include KOOL, LUCKY STRIKE, CARLTON, CAPRI, GPC, MISTY, and
VICEROY.
TV NETWORKS: Age Discrimination Is the Subject in Scribes' Suit
---------------------------------------------------------------
Twenty-eight television writers over the age of 40 filed a class-action
lawsuit Monday against the major TV networks, studios and talent
agencies, alleging that they intentionally engage in age discrimination
when they make their hiring decisions.
The named plaintiffs include Tracy Keenan Wynn, 55, whose work includes
"The Autobiography of Miss Jane Pittman"; Ann Marcus, who is in her 70s,
whose credits include "Mary Hartman, Mary Hartman," "Knots Landing" and
"Falcon Crest"; Jay Moriarty, 54, who worked on "All in the Family," "The
Jeffersons" and "Maude"; and Art Eisenson, 58, whose credits include
"Kojak."
The defendants include NBC, the Walt Disney Co. and ABC, Fox
Entertainment Group, Time-Warner, Viacom and CBS, Columbia TriStar,
DreamWorks and talent agencies such as CAA, ICM and the William Morris
Agency.
ICM declined to comment. A William Morris spokesman said he had not seen
the suit and therefore couldn't comment. Other defendants were not
available to comment late Monday afternoon.
"It is not a secret that NBC and others in the TV industry have an open
and notorious policy of not allowing older writers on their productions,"
said lead plaintiffs' attorney Paul Sprenger of Washington, D.C.'s
Sprenger & Lang. "The talent agencies won't waste time on older writers.
The agencies are aiding another Hollywood blacklist, only this time, it's
a graylist."
According to the complaint, filed in U.S. District Court in Los Angeles,
systematic discrimination against television writers over 40 has been
pervasive since the early 1980s as networks and advertisers are seeking
younger audiences and believe they need younger writers to attract them.
Alleged Violations
The suit alleges violations of the federal Age Discrimination in
Employment Act, the Labor Management Relations Act and the California
Fair Employment and Housing Act. It seeks damages and injunctive relief.
The massive 81-page complaint is filled with damning statistics and
individual horror stories. According to the complaint, 70% of all TV
comedy writers are under 40, while those in that age group comprise only
42% of available writers. The plaintiffs allege that whereas only 19
series during the 1990-91 TV season employed no writer over the age of
50, by the 1997-98 season, 77 series --- about two-thirds --- had no
writer over 50.
In Their Own Words
The plaintiffs also allege that Gary David Goldberg, a producer for ABC's
"Spin City," said the program had no writers on the set over the age of
29 --- by design. The complaint cites a comment by "Friends" producer
Marta Kauffman that older writers are not hired because after the age of
40 they can no longer "do it" and because the networks and studios are
looking for young people coming out of college. Implicating the agencies,
the complaint also alleges that Paul Haas, a senior vice president of
ICM, has stated, "Age matters. When we have someone network executives
haven't heard of, they want to know how old the writer is."
The suit stems from a 1998 study commissioned by the Writers Guild of
America West that showed sharply decreased employment opportunities for
scribes over 40. Earlier this year, the WGA approved allowing law firm
Sprenger & Lang to use its membership list to send out written questions
to determine if there was enough evidence to support a class-action
discrimination suit. (Daily Variety, October 24, 2000)
* 3 EEOC Lawsuits Show ADA Related Pitfalls at 3 Stages for Employers
---------------------------------------------------------------------
The ADA's rules regarding medical examinations and inquiries have not
formed the sole basis for most of the employment-related claims that have
been filed under the statute. But three new lawsuits filed by two
district offices of the Equal Employment Opportunity Commission show the
pitfalls that loom for employers in this area at three separate stages of
the employment relationship: pre-employment, pre-offer; pre-employment,
post-offer; and current employment.
First Suit: Screeing Test
In the first suit, filed late last month, Rosa Liliana Palacios, trial
attorney for the EEOC's Boston area office, and Katherine E. Bissell,
acting regional attorney for the agency's New York district office,
signed a complaint against American Airlines, Inc., and its parent
corporation Worldwide Flight Services, Inc. The complaint describes the
case of Thomas Hanrahan, who applied for a job as a ramp clerk/cabin
cleaner at a Rhode Island airport in 1997. After a job interview and
before any job offer had been made, the complaint says, Hanrahan was
asked to report for a routine drug test. When he did so, the EEOC
alleges, he was subjected to a series of questions regarding his medical
history and medical condition. In response to the questions, Hanrahan
disclosed that he used prescription medication and that he had twice been
hospitalized for mental illness.
American Airlines responded to Hanrahan's disclosures by seeking more
detailed information regarding the use of prescription medication, which
he provided. Approximately two months later, after he had contacted the
employer several times regarding the status of his application, Hanrahan
was told that he was no longer being considered for the position.
The employer's medical inquiries and failure to hire Hanrahan violate the
ADA, the EEOC claims. The agency filed the suit as a class action, saying
that the employer subjected other applicants to illegal inquiries under
the guise of administering a permissible drug screening. The suit seeks
back wages, compensatory and punitive damages, and a policy change that
eliminates the alleged improper questioning.
"Job applicants have the right to be judged on their ability to do the
work, not on prejudice based on their mental or physical disabilities,"
said Bissell. "The EEOC will seek full relief against employers who
improperly question and discriminate against disabled job applicants."
Second suit: post-offer, pre-employment
In a second suit, the EEOC's Memphis district office claims that
Northwest Airlines, Inc., refused to hire Kevin Armstrong as a equipment
service employee because he has diabetes.
Armstrong, the suit says, applied for a job as an equipment service
employee with Northwest in January 1998. He was offered the position
contingent on his successful completion of a pre-placement physical
examination, the agency claims.
During the physical examination, which was conducted in May 1998,
Armstrong revealed that he has insulin-dependent diabetes. The examining
physician restricted Armstrong from driving heavy equipment or working at
unprotected heights, a restriction that Armstrong insisted was
unwarranted. Northwest subsequently withdrew the job offer, prompting the
suit. The EEOC action seeks backpay and other relief on Armstrong's
behalf.
Third Lawsuit: Medical Screeing during Employment
In a third suit, the EEOC's Memphis district office sued Tennessee
employer Murray, Inc., on behalf of forklift/towmotor operator Raymond T.
Waits near the end of last month. Murray, the complaint says, had a
practice of subjecting forklift/towmotor operators to a medical screening
every three years - a practice that would squarely conflict with the ADA
requirement that current workers be subjected to medical examinations or
inquiries only when such examinations or inquiries are job-related and
consistent with business necessity. Waits, who had been employed by
Murray since approximately 1968, revealed during an October 1997 medical
screening that he has insulin-dependent diabetes. In a matter of days,
his employment was terminated.
The suit against Murray, which has also been filed as a class action,
claims that Murray has been requiring forklift/towmotor operators to
submit to unlawful medical inquiries and examinations since at least
1996. It seeks to permanently enjoin Murray from subjecting employees to
unlawful medical examinations or inquiries. It also seeks damages on
behalf of Waits and other similarly aggrieved employees, including
punitive damages. (Disability Compliance Bulletin, October 20, 2000)
* NJLJ Presents Review on Price Controls for Prescription Drugs
---------------------------------------------------------------
Byline: Frederick T. Smith *Smith Is A Partner In The Product Liability
Group Of The Newark Office Of Mccarter & English. Jay Greenstone, An
Associate With The Firm, Provided Helpful Research.
Concern about the retail price of prescription medicine today dominates
the headlines and drives major regulation by all three branches of
government at all levels. Federal drug pricing proposals by candidates in
Campaign 2000 are now central in the national political debate as we
approach the November elections.
Both George W. Bush and Albert Gore recently announced their proposals.
The issue has international implications, as advocates for domestic U.S.
price ceilings argue that, because of our free market economy, American
consumers are indirectly financing lower prices in Europe, Canada and
Mexico, given the availability of our pharmaceutical products abroad and
pervasive government price controls in those countries.
We have to monitor these developments carefully. They challenge one of
our most important business sectors: the New Jersey pharmaceutical
industry.
A total of 18 states introduced laws last year intended to force down the
price of prescription drugs; as of this month, that number hit 22. In May
2000, the state of Maine enacted legislation imposing actual price
controls; other states are close to enacting such proposals, most
prominently New York, Nevada and Illinois.
This may only be the tip of the iceberg, according to Richard Cauchi, the
senior policy specialist on health issues for the National Conference of
State Legislatures. Most states are considering proposals, some more
Draconian than others.
A few have adjusted eligibility for Medicaid, with its prescription drug
benefit, to cover additional people. For example, in 1999, California
enacted SB 393, which requires pharmacies that serve Medicaid
beneficiaries to provide a similar discount price to Medicare
beneficiaries. The Massachusetts fiscal year 2000 budget includes
authorization for a state bulk purchasing program for pharmaceuticals for
an eligible population estimated at up to $16 million.
A Minnesota law, signed on March 31, 2000, regulates and restricts
pharmacy discounts card plans. Even the less market-intrusive of these
proposals are questionable, given their random mix of indirect,
cost-restrictive effects on retail prices.
Generally, these bills seek to use the current "lowest available price"
or Medicaid-style rebates or discount rates as a ceiling for a retail
price, instead of providing a direct state-funded subsidy. New Jersey
already has proposals in the pipeline.
The issue has also been joined in the least appropriate forum for setting
the early stage of health-care/economic policy: the courts. A number of
class- action lawsuits by retail pharmacies and individuals alleging a
price-fixing conspiracy by pharmaceutical manufacturers have been filed.
These litigations represent transparent, backdoor restraints on
pharmaceutical prices; their randomness and diversity directly conflict
with the emphasis on consistency and predictability so vibrant in
contemporary tort reform jurisprudence and so reassuring to the business
community.
Finally, the Maine act, which became effective on Aug. 12, has been
challenged on constitutional grounds that the price control statute is
violative of interstate commerce. The other shoe has dropped in the
doorway of interminable litigation.
At a superficial level, the issue requires us to reconcile higher drug
prices, improved industry profits and the needs of our most vulnerable
population, the elderly. But the problem really turns on the inadequacies
of a failing government program, Medicare. Even more prominent in this
controversy is the importance of preserving the vitality of that feature
of our economy that has made the entire question possible -- research and
development in a pharmaceutical industry that produces miracles every day
all over the world.
What has emerged as a solution, although in some cases indirectly, is a
failed economic tool, price controls, an approach with a proven track
record of failure in America.
The Pharmaceutical Industry
Consider the recent address offered by Vice President Albert Gore at the
Democratic Convention. After pledging that "I will fight for you," Gore
recited a litany of presumed enemies of the average American citizen
against which the war must be waged: "... big tobacco, big oil, big
polluters, big pharmaceutical companies. ..."
Pharmaceutical companies? Has the debate now become so distorted that the
extraordinary contributions of pharmaceutical companies are deemed
morally equivalent to the deleterious effects of tobacconists and even
polluters in society?
The pharmaceutical industry is today a victim of its own extraordinary
success in bringing sophisticated, life-saving medicines to the public.
Almost half the important new medicines in the world have been discovered
or developed by the U.S. pharmaceutical industry. American industry
stands above that of other countries in its production of superior goods
and services, but pharmaceuticals truly represent its premier
contribution to the world.
In the 35 years since the creation of Medicare during the Johnson
administration, prescription medicines, once a minor segment of the
commercial drug market, have assumed a predominant share, particularly
for the elderly. While such medicines were once used primarily in medical
crises to treat pain and fight infection, they are now frequently applied
daily to maintain the lives of millions of Americans. Enhancement of the
quality of life for Americans as well as its improved longevity are in
large measure attributable to the development of innovative prescription
medicines.
Statistics published by the Pharmaceutical Manufacturers Association, a
research group with a primary commitment to pharmaceutical research, are
telling. In 1900, the average life expectancy was 42 years for Americans.
Today, the average child born can expect to live almost twice as long,
until age 80. In fact, every five years since 1965, roughly one
additional year has been added to average life expectancy at birth. By
the year 2005, nearly 30 percent of the U.S. population will be 50 years
or older. Today, the fastest growing age group in America is seniors over
age 85.
The National Center for Health Statistics announced on Oct. 5, 1999, that
HIV/AIDS mortality has declined more than 70 percent since 1995 and AIDS
cases are no longer among the top 15 causes of death, a fall from eighth
place in 1986. Since 1965, drugs have helped cut emphysema deaths by 57
percent and ulcer deaths by 25 percent.
Indeed, prescription medicines have improved health outcomes, reduced
total health-care costs and have had the broader effect of keeping people
out of hospitals, emergency rooms and nursing homes and on the job.
Employers have better workers, improved productivity and avoid
additional, expensive health services. It is almost impossible to
estimate the overall positive effect of prescription medicines on the
American economy.
Our pharmaceutical companies spend more than $20 billion annually on
research and development, a figure that has doubled every five years
since 1970. Through a recent wave of mergers and acquisitions, our
prescription drug industry is now global in presence and impact. But it
is beyond question that international companies do most of their basic
research in the United States. America is the world leader in
pharmaceutical research and development.
Pharmaceuticals are the predominant answer to our society's health
problems, despite being shackled by an outmoded distribution system and
support program. While the Medicare program, as originally conceived,
covered certain hospitals and inpatient services, it has never included
an outpatient drug benefit, an enormous deficiency at a time when
outpatient treatment for our homebound seniors and hospice services have
become crucial alternatives for eldercare.
Thus, the roots of the present riddle over prescription drug pricing lie
in the problems of the governmental program that sponsors coverage of
Medicare. The current program is based on a 1960s-style,
"one-size-fits-all" model that already relies on centralized price
controls and Byzantine regulations. The result is a program that is
confusing for patients and providers to understand, difficult to
administer, outmoded and completely inadequate to meet the health-care
needs of the new millennium.
According to the National Academy of Social Insurance, while about two-
thirds of the Medicare population has some form of prescription drug
benefit, the remaining one-third or so has no outpatient drug coverage,
presumably because they are unwilling or unable to purchase insurance or
pay cash for medicines. Clearly, the immediate answer is to modernize
Medicare so that the elderly and the disabled have a financially sound
and pragmatically solid program.
More to the point, solutions should dovetail with existing trends in the
health-care industry, including participation by the elderly in the
development of managed care programs and related access to benefits
available under those programs.
Indeed, a range of factors must be considered in proposed public reforms.
Should broader Medicare coverage include our large number of wealthy
seniors? Should not new formulas involve consideration of the great
number of drug companies offering free medicines to indigent patients
with proper physician authorization? Should we not attempt to simplify
maze of premiums, deductibles and copayments presented by Medicare? Don't
the diverse needs of Medicare patients require more choices, options and
flexibility in the program? Yet the unlikely, simple-minded target of
government regulation has been medicine pricing within the industry
itself.
The debate over pharmaceutical prices has already hurt our research
institutions. For example, the National Institutes of Health are now in
the crossfire. The medical agency is under political pressure to cap or
recover profits on drugs whose development was based on publicly funded
research.
Recently, intensive lobbying by the pharmaceutical industry helped to
defeat two amendments to the Senate finding bill for the NIH. These would
have forced radical changes in the rules for the transfer of technology
from universities to corporations resulting from publicly funded
research.
Under the current system, implemented through the landmark Bayh-Dole Act,
a truly bipartisan piece of legislation, companies already pay licensing
fees to the institution that patented an innovative product. But neither
the companies nor the universities have had to pay the government
anything.
The Bayh-Dole Act was intended to allow corporations freedom to patent
and profit from publicly supported university research without entering
into complex legal agreements with the government. The incentives created
under this act are credited by economists as the key to the success of
U.S. biotechnology, the engine of future pharmaceutical development,
which has grown much faster than its counterparts abroad.
State Legislation
Recent legislative proposals in New Jersey should trigger concern, but
Maine is where the action is. The Maine act, a "compromise" bill, will
reduce the prices of prescription medicines 15 percent for state
residents who are not covered by private insurance or Medicare. The move
would arbitrarily reduce prescription drug prices in the state to the
levels paid under Medicaid and the Veterans Administration.
Maine proved to be a predictably ripe venue for such price restrictions,
given its proximity to Canada and the temptation for its residents to
cross the border and purchase medicines in a country heavy with price
controls. But the issue does not turn on geographical proximity; foreign
countries now aggressively market their pharmaceutical products within
our shores and offer them by mail order. Sometimes these are the same
products available within our borders at higher prices.
The constitutional infirmities of the Maine act open the door to
extensive, wasteful litigation that may duplicate itself across the
country as other states, following Maine's example, pursue equally
dubious legislative strategies. As a policy answer, the Maine act sets a
terrible precedent.
First of all, existing federal Medicare legislation on the scope, limits,
process and standards for benefits at least impliedly occupies the field
with respect to several provisions of the Maine Act, making certain
provisions potentially vulnerable to pre-emption challenges. Of more
practical import, access to health care is a national problem that
requires a federal solution, not a hodgepodge response that varies from
state to state.
Second, the Maine act suffers from pervasive ambiguity, entirely
entrusting to state government bureaucrats important decisions as to
price standards. It is hard not to believe that pressure will exist for
Maine to act in concert with price ceilings imposed across its borders in
Canada. Many Medicare enrollees are aged, blind and disabled.
They have unique and disparate needs for prescription drugs. They will be
at the mercy of bureaucrats in Maine, who will make unilateral decisions
largely on the basis of cost and Canadian prices. In that respect, the
Maine legislation is again constitutionally vulnerable -- as arbitrary
and capricious. The Maine law is also overbroad -- it would impose
controls not only on major drug manufacturers but on the very vulnerable
corner druggist.
Of no less concern is the probable effect on industry in Maine. For
business, the message of the Maine act is that the state is an
unpredictable place to invest. It suggests that innovation not be
rewarded in a way commensurate with its risk. Maine's citizens, no doubt,
will feel the effects of declining investment at precisely the wrong time
-- as the baby boomer generation retires and faces increasing need for
these products.
And then there are the other even more direct risks to American citizens.
Without careful monitoring, the import of foreign drugs may undermine the
ability of the Food and Drug Administration to protect patients from
substandard, poorly manufactured or risky drugs from abroad.
No one considers the deleterious effect of historical price controls in
foreign countries on the development of quality drugs in these countries.
No one can confirm that such pharmaceuticals are not counterfeit or not
equal to U.S. dosages. While the U.S. government should never supersede
the market in the determination of retail prices, its role in ensuring
safe medicines for Americans is another matter. The Maine act will hurt
that state's economy, hurt its patients and impair its vital
pharmaceutical industry.
New Jersey
The safety net that New Jersey provides its Medicare population is the
Pharmaceutical Assistance to the Aged and Disabled program. Funded
principally through the Casino Revenue Fund, the PAAD offsets and absorbs
drug cost increases, but price trends raise doubts about its capacity to
continue in its role as a buffer. Despite a steady decline over the past
five years in the number of PAAD recipients (down 15 percent since fiscal
year 1995), program costs have actually soared 46 percent over the same
period.
The cost increase has principally been driven by a 38 percent cumulative
increase in the number of prescriptions filled. A dramatic increase in
the use of new drugs that test high blood pressure, heart disease and
cholesterol explains the paradox of more prescriptions for fewer
recipients.
Our state also stands apart in the number of its citizens eligible for
benefits. New Jersey counts more than 200,000 people receiving benefits,
while 30,000 Michigan residents qualify for that state's pharmacy
assistance program. Such programs are funded strictly with state dollars,
and often require some degree of cost-sharing from the participant.
As the state with the reputation as the nation's medicine chest, New
Jersey can take pride in its national eminence as corporate home to some
of the world's largest and most successful pharmaceutical companies.
But even beyond its visibility in producing cost-effective and
medicinally superior drugs that save lives, New Jersey, buoyed by a $10.3
billion pharmaceutical economy that employs 55,000 workers, risks much in
this controversy, unless our political leadership seeks careful,
deliberative solutions -- with industry at the table -- for closure in
what promises to be an intense public policy debate.
In the words of the Oxford philosopher, George Santayana, those who
cannot remember the past are condemned to repeat it. During the early
1970s, the American economy was virtually brought to its knees by an
economic policy adopted by the Nixon administration that most
contemporary economists had hoped today was a memory safely in the past:
price controls.
Yet today, in response to the growing debate over prescription drug
prices, that same mistaken policy has returned to haunt us.
This bad policy outcome can only create disincentives for innovation and
research, limits in the supply of medical services, higher costs for
consumers, a decline in the availability of badly needed prescription
medicine for all of us and potential economic reversals for a state so
uniquely dependent on the health of its pharmaceutical industry. (New
Jersey Law Journal, October 23, 2000)
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