Forest Labs: From A Raw Deal To A Winning Hand

How the drugmaker turned the tables on plaintiffs' lawyers

To Howard Solomon, chairman of New York-based Forest Laboratories Inc., it felt almost like a false arrest. In March, 1994, plaintiffs' lawyers filed a class-action suit in Chicago accusing the drug manufacturer of participating in an extensive price-fixing scheme with 30 other companies. Solomon had no idea if any of the other defendants were guilty, but because Forest employees had never attended any of the trade association gatherings where the price-fixing discussions allegedly took place, he knew his own company was innocent. "I had never even heard of some of those other companies. How could we be co-conspiring? The whole idea was absurd," says the trim 71-year-old former attorney.

When Forest tried to get out of the case in April, 1996, though, the plaintiffs' attorneys assured U.S. District Judge Charles P. Kocoras that they had concrete evidence linking the company to the conspiracy. Forest's lawyers insisted that their accusers were exaggerating the strength of their case, but because the judge was legally obligated to assume that the plaintiffs' lawyers were telling the truth, he rejected the company's request to be dismissed from the case. It meant that the $427 million drug company, maker of the antidepressant Celexa, suddenly faced more than $200 million in potential liability.

At this point, many companies would have simply folded. But even after Merck, Abbott, Pfizer, and 18 other pharmaceutical makers forked over a total of more than $700 million to allegedly victimized retail pharmacies, Forest gamely fought on. It was a wise move. Declaring that there was no evidence at all of any price-fixing conspiracy in the pharmaceutical industry, Kocoras threw out the lawsuit last November.

Then, Forest did something companies rarely do. Convinced that the plaintiffs' attorneys had misrepresented the testimony of a key witness to Kocoras at the April, 1996, hearing, Forest set about trying to prove that the deception was deliberate. Once they had marshaled their evidence, Forest's lawyers then accused the plaintiffs' attorneys of violating Section 1927 of the U.S. Civil Code, an obscure law prohibiting "vexatious" litigation tactics, and asked to have $2.1 million in legal fees refunded. On Apr. 29, Kocoras granted the request--one of the few times a company has ever managed to convince a judge that plaintiffs' lawyers intentionally misled the court.

NEW TOOL. Word of Forest's victory has invigorated the ranks of America's corporate defense litigators, who are hoping to use the precedent as a new tool against baseless lawsuits. Frustrated in their attempts to win broad legislative tort reform, manufacturers have been stepping up their efforts to use existing procedural rules to get sanctions imposed on plaintiffs' attorneys who bring frivolous claims. But until the Forest decision, many considered it all but impossible to prove that opponents were guilty of deliberate misrepresentation--the high legal standard required by Section 1927. "I was delighted to see this case. We're hoping to see this type of thing happen a lot more often," says Lewis H. Goldfarb, associate general counsel at DaimlerChrysler Corp.

The coalition of more than a dozen plaintiffs' firms that brought the price-fixing suit, including Philadelphia's Berger & Montague, San Francisco's Saveri & Saveri, and Specks & Goldberg of Chicago, has appealed both the Section 1927 decision and the underlying case. Arguing that there was a reasonable basis for suspecting that Forest had participated in the alleged conspiracy, one of the lawyers said his team did not mislead Judge Kocoras.

This attorney, who requested anonymity, predicted that the decision will have "a chilling effect" on lawyers bringing consumer suits against well-funded corporate defendants. "If judges start sanctioning lawyers for this type of thing more frequently, pretty soon nobody is going to want to practice this type of law," the lawyer said.

Filed at a time of mounting public anger at the cost of drugs, the suit alleged Forest and other drugmakers had set up a two-tier system of pricing. While health-maintenance organizations and other favored customers received steep discounts on drugs, retail pharmacies had to pay full price. To ensure that the alleged conspirators toed the line, the plaintiffs said, drugmakers had sophisticated mechanisms for setting prices and preventing members from offering discounts.

Details of this price-fixing conspiracy, the plaintiffs said, were largely ironed out at meetings of a key trade association, the Pharmaceutical Manufacturers Assn. Although Forest didn't belong to this group, the plaintiffs nonetheless told the judge at the April, 1996, summary-judgment hearing they had solid evidence tying Forest to the cartel.

In particular, the plaintiffs placed great weight on the testimony of Richard Spears, an executive for a purchasing cooperative made up of small pharmacies. During his deposition, Spears said a Forest manager told him the company had to cancel a discount contract with his group because "other suppliers objected to [Forest's] supplying a [pharmacy] buying group directly." To the plaintiffs, this was a clear smoking gun--an acknowledgment that Forest not only participated in the conspiracy, but "knuckled under to pressure from other cartel members" when it failed to follow the rules.

Forest's outraged attorneys argued this was a complete misinterpretation of Spears's testimony. Rather than referring to other drug manufacturers, the "suppliers" the Forest manager had been talking about were the company's own wholesalers. Though the company's lawyers offered evidence to support this reading of the deposition, Kocoras was in no position to sort out who was telling the truth. Buried under millions of pages of documents, he was unable "to verify every deposition citation," as he later wrote in his Section 1927 decision. As a result, he was forced to rely "on the accuracy of [the plaintiffs'] characterization of the evidence and the truth of it."

GREEN LIGHT. Once Kocoras had denied Forest's request to be dropped from the case, the plaintiffs' attorneys gained immense bargaining power. Seeking billions of dollars in damages, they now had a green light to ask a jury to punish the pharmaceutical industry for the high price of medicine--a prospect that scared Forest's team. "They wanted to do a trial based on emotion: the big, bad manufacturers overcharging for prescription drugs," says Herschel S. Weinstein, a partner at New York's Dornbush Mensch Mandelstam & Schaeffer who serves as Forest's general counsel.

Well aware of their leverage, the plaintiffs' lawyers upped the settlement ante. While Forest could have escaped for about $4 million before the April, 1996, summary-judgment motion, the price rose to more than $15 million afterward. That was a lot of money for a suit with no merit, but still a lot less than the fortune the company risked at trial, where the plaintiffs would claim billions of dollars in damages--and be entitled under antitrust law to triple any award if they won. Indeed, the pressure to settle was so great that the plaintiffs appeared to believe all of the defendants would "cave in," says Peter J. Venaglia, a Dornbush Mensch partner who litigated the case. They were banking on the fact that no one "would want to debate the pricing of prescription drugs in front of a jury," Venaglia says.

And many didn't. Although they didn't admit guilt, Hoechst Marion Rousell settled for $149.5 million, Pharmacia & Upjohn for $102 million, and Merck for $52 million. That, in turn, prompted Forest directors to question whether the company had chosen the wrong path. "They were reading that other companies were settling--sometimes for big amounts of money--and wanted to know why we weren't," Weinstein recalls.

STAR WITNESS. These worries grew even more intense when the plaintiffs said their star economic witness would be Nobel Prize winner Robert E. Lucas Jr. Mock juries, meanwhile, indicated that many laypeople were sympathetic to the plaintiffs' arguments. But in a critical meeting in April, 1998, Solomon, a corporate lawyer before joining Forest, concluded the plaintiffs simply didn't have the goods against his company. "I decided it was a reasonable business risk for us to take," says Solomon. "We take a risk when we launch a product, we take a risk when we hire an employee, we take risks all the time."

Solomon's gamble paid off. After hearing several weeks of testimony from plaintiffs' attorneys, Kocoras tossed their case without requiring the defense to put up even one witness. In a stinging opinion, Kocoras--appointed by President Jimmy Carter--said the plaintiffs' case was based upon little more than layers "of speculation."

Sensing the judge's anger, Forest's legal team decided to try a Section 1927 motion. Digging through the evidence, the team detailed several reasons the plaintiffs attorneys should have known there was no evidence against Forest. Kocoras readily agreed, declaring that they "repeatedly misrepresented...evidence of conspiratorial conduct against Forest." On appeal, plaintiffs' lawyers will argue their interpretation of the Spears testimony was reasonable, a member of the coalition said.

In the wake of the decision, at least one of the other companies that stayed in the lawsuit is considering filing its own 1927 motion. And Forest, meanwhile, is thinking of ways to milk extra dividends from the decision. Noting that the company is facing several other flimsy suits, Weinstein is considering putting them on notice of the costs of tangling with Forest. How? By sending them a copy of Kocoras' decision.

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