Judging the Jury
Why the tsunami of litigation against drugmaker Merck over the Vioxx recall may hurt consumers more than the corporation allegedly at fault.
Nov. 30, 2005 - Most people supposedly hate attorneys. Indeed, Shakespeare once wrote: "First thing we do, let's kill all the lawyers." Now, I'm not advocating violence in any way, but the reputation of the legal profession hasn't changed all that much over the years. All you have to do is look at any poll and you'll find it at or near rock bottom in the public's opinion (along with, I'm afraid to say, working journalists).
Why then do people continue to side with lawyers who demand huge awards for product-liability lawsuits? I raise this question after reading the latest news about Merck & Co., the third-largest U.S. drug manufacturer. The company recently announced that it's cutting 11 percent of its workforce, around 7,000 jobs, in large part because of a massive, potential liability stemming from its once-popular painkiller Vioxx.
Merck pulled the drug last year after a study showed that Vioxx could increase the risk of heart attacks in some patients. But the company didn't remove the drug fast enough to save Robert Ernst, who died of heart complications after taking the drug. In August, a Texas jury found Merck liable for Ernst's death and awarded his family one of the largest punitive-damage awards in the history of product liability--$253 million. Merck's problems don't end there; the company faces more than 6,000 other Vioxx related lawsuits, and tens of billions of dollars in potential damages once all is said and done.
You might be tempted to say, as apparently the jury did, that Merck got what it deserved. Ernst was a 59-year-old triathlete with no history of heart trouble, at least according to his lawyer Mark Lanier. As Lanier told me while we were both guests on the CNBC business network several weeks ago, Ernst "wasn't one pork chop away from a heart attack."
With facts like those, it's easy to see how jury sided with the plaintiff. I wasn't in the courtroom, but from what I read, Lanier put on quite a show; he was masterful at depicting Merck's alleged negligence, asserting that the company ignored data showing that Vioxx could cause heart attacks in certain people, and when it did disclose the risks, it did so in a way that most people couldn't really understand. Lanier doubles as a Baptist minister (during the trial, he made repeated references to the Bible), and this Bible-belt jury clearly ate up his down-home logic, particularly compared to the robotic performance of Merck's legal team, which never seemed to connect with jurors and may have angered some with its tough cross examination of Ernst's widow.
Well, I'm here to tell you that the Vioxx case is plenty more complicated that Lanier lets on, and unfortunately for all of us, its impact will be felt by far more people than the 7,000 Merck employees who will soon lose their jobs. Start with some of the facts surrounding Robert Ernst, the alleged victim in the first Vioxx case. Ernst may have been a triathlete as his lawyer loves to point out, but he was once a smoker and had clogged arteries. In other words, he probably wasn't a "pork chop away from a heart attack," but he wasn't the picture of health, either.
Several legal experts say for these reasons and others (Texas is supposed to be the home of big jury awards but it also has a cap on punitive damages) the Ernst award will be slashed from $253 million to closer to $25 million. Even so, you won't hear Merck or its employees cheering. It's likely that Merck will have to fight thousands of additional lawsuits from people who say they were harmed one way or another by the drug. And if the fact pattern in the Ernst case can generate such a huge award, there's no telling how much more money Merck will be forced to pay in the coming years.
Some analysts say the company could ultimately shell out between $18 billion to $50 billion in judgments, settlements and legal fees related to Vioxx--more than six times the $5 billion in annual revenue company earned last year. But history also shows those numbers are likely to be low. James Copland, director of the Center for Legal Policy at the Manhattan Institute who has studied the history of jury awards, says the final liability “almost always blows past the initial estimates." In other words: if you think that the loss of 7,000 jobs is messy, that's going to look like a drop in the bucket once those 6,000 lawsuits are finished and the final tab is computed.
To be sure, Merck's problems go beyond Vioxx. The company's patent on another popular drug, Zocor, which reduces cholesterol, is ending next year, leaving it open to competition from generic drug manufacturers. Maybe more problematic: Merck isn't the center of drug innovation; analysts say the company has few promising drugs in its pipeline.
Even so, you can't underestimate the impact such a big liability will have on the company. Developing new drugs is a costly business, and all those legal bills will certainly eat into the firm's R&D budget. Merck, meanwhile, won't lose every case it fights--earlier in the month, a jury in New Jersey found that the company had adequately disclosed the health risks associated with Vioxx, and ruled in its favor. But even if Merck manages to win half of the cases it now faces, analysts say its price tag will still be enormous, forcing even more cost cutting (read: job cuts). Merck's stock has already dropped 70 percent in the last five years. If the company fails to find another miracle drug to improve its bottom line, bankruptcy may not be far away.
Which brings me to my larger point: when are juries going to take into account the economic costs of their action? I'll be the first to admit that sometimes it's easier to hate corporate America even more than all those loathsome lawyers (or for that matter, nerdy journalists). I, for one, have made a career exposing the duplicity and corruption of Wall Street's top firms, and I'll be the first to side with any plaintiff that has a clear-cut case of fraud.
But such black-and-white cases, at least in my experience, have been rare. I've covered some of the biggest Wall Street scams over the past 15 years, and in almost every case, the alleged "victims" allowed themselves to be victimized one way or another. Some were greedy and chose to roll the dice with risky investments peddled by sleazy Wall Street brokers, while others were plain-old stupid, ignoring every warning sign or doing minimal homework before throwing their money away. This is not to say that Robert Ernst's family deserves no money, but given the facts of his particular case, is his $253 million award against Merck justified? And what does that mean for Merck's future given the 6,000 other Vioxx cases that could be decided in the plaintiff's favor with a similar fact pattern?
Maybe the best solution to the problem is to allow all those average Americans who sit on juries hear what these massive jury awards cost other average Americans. The U.S. Chamber of Commerce estimates that each year legal costs drain $230 billion from the economy. It's known as a "dead-weight cost" because it's merely a transfer of wealth from corporate America to plaintiffs, and disproportionately, their attorneys. Then let them hear how outsized awards can destroy a company that employs tens of thousands of people and may someday find a cure for cancer or AIDS. Maybe then they'll start listening less to lawyers.
Editor's note: Charles Gasparino is leaving NEWSWEEK to become an on-air editor for CNBC's financial news program "Squawk Box." However, he will continue writing his Street Fighting column as a contributor to NEWSWEEK.com.
Nov. 30, 2005 - Most people supposedly hate attorneys. Indeed, Shakespeare once wrote: "First thing we do, let's kill all the lawyers." Now, I'm not advocating violence in any way, but the reputation of the legal profession hasn't changed all that much over the years. All you have to do is look at any poll and you'll find it at or near rock bottom in the public's opinion (along with, I'm afraid to say, working journalists).
Why then do people continue to side with lawyers who demand huge awards for product-liability lawsuits? I raise this question after reading the latest news about Merck & Co., the third-largest U.S. drug manufacturer. The company recently announced that it's cutting 11 percent of its workforce, around 7,000 jobs, in large part because of a massive, potential liability stemming from its once-popular painkiller Vioxx.
Merck pulled the drug last year after a study showed that Vioxx could increase the risk of heart attacks in some patients. But the company didn't remove the drug fast enough to save Robert Ernst, who died of heart complications after taking the drug. In August, a Texas jury found Merck liable for Ernst's death and awarded his family one of the largest punitive-damage awards in the history of product liability--$253 million. Merck's problems don't end there; the company faces more than 6,000 other Vioxx related lawsuits, and tens of billions of dollars in potential damages once all is said and done.
You might be tempted to say, as apparently the jury did, that Merck got what it deserved. Ernst was a 59-year-old triathlete with no history of heart trouble, at least according to his lawyer Mark Lanier. As Lanier told me while we were both guests on the CNBC business network several weeks ago, Ernst "wasn't one pork chop away from a heart attack."
With facts like those, it's easy to see how jury sided with the plaintiff. I wasn't in the courtroom, but from what I read, Lanier put on quite a show; he was masterful at depicting Merck's alleged negligence, asserting that the company ignored data showing that Vioxx could cause heart attacks in certain people, and when it did disclose the risks, it did so in a way that most people couldn't really understand. Lanier doubles as a Baptist minister (during the trial, he made repeated references to the Bible), and this Bible-belt jury clearly ate up his down-home logic, particularly compared to the robotic performance of Merck's legal team, which never seemed to connect with jurors and may have angered some with its tough cross examination of Ernst's widow.
Well, I'm here to tell you that the Vioxx case is plenty more complicated that Lanier lets on, and unfortunately for all of us, its impact will be felt by far more people than the 7,000 Merck employees who will soon lose their jobs. Start with some of the facts surrounding Robert Ernst, the alleged victim in the first Vioxx case. Ernst may have been a triathlete as his lawyer loves to point out, but he was once a smoker and had clogged arteries. In other words, he probably wasn't a "pork chop away from a heart attack," but he wasn't the picture of health, either.
Several legal experts say for these reasons and others (Texas is supposed to be the home of big jury awards but it also has a cap on punitive damages) the Ernst award will be slashed from $253 million to closer to $25 million. Even so, you won't hear Merck or its employees cheering. It's likely that Merck will have to fight thousands of additional lawsuits from people who say they were harmed one way or another by the drug. And if the fact pattern in the Ernst case can generate such a huge award, there's no telling how much more money Merck will be forced to pay in the coming years.
Some analysts say the company could ultimately shell out between $18 billion to $50 billion in judgments, settlements and legal fees related to Vioxx--more than six times the $5 billion in annual revenue company earned last year. But history also shows those numbers are likely to be low. James Copland, director of the Center for Legal Policy at the Manhattan Institute who has studied the history of jury awards, says the final liability “almost always blows past the initial estimates." In other words: if you think that the loss of 7,000 jobs is messy, that's going to look like a drop in the bucket once those 6,000 lawsuits are finished and the final tab is computed.
To be sure, Merck's problems go beyond Vioxx. The company's patent on another popular drug, Zocor, which reduces cholesterol, is ending next year, leaving it open to competition from generic drug manufacturers. Maybe more problematic: Merck isn't the center of drug innovation; analysts say the company has few promising drugs in its pipeline.
Even so, you can't underestimate the impact such a big liability will have on the company. Developing new drugs is a costly business, and all those legal bills will certainly eat into the firm's R&D budget. Merck, meanwhile, won't lose every case it fights--earlier in the month, a jury in New Jersey found that the company had adequately disclosed the health risks associated with Vioxx, and ruled in its favor. But even if Merck manages to win half of the cases it now faces, analysts say its price tag will still be enormous, forcing even more cost cutting (read: job cuts). Merck's stock has already dropped 70 percent in the last five years. If the company fails to find another miracle drug to improve its bottom line, bankruptcy may not be far away.
Which brings me to my larger point: when are juries going to take into account the economic costs of their action? I'll be the first to admit that sometimes it's easier to hate corporate America even more than all those loathsome lawyers (or for that matter, nerdy journalists). I, for one, have made a career exposing the duplicity and corruption of Wall Street's top firms, and I'll be the first to side with any plaintiff that has a clear-cut case of fraud.
But such black-and-white cases, at least in my experience, have been rare. I've covered some of the biggest Wall Street scams over the past 15 years, and in almost every case, the alleged "victims" allowed themselves to be victimized one way or another. Some were greedy and chose to roll the dice with risky investments peddled by sleazy Wall Street brokers, while others were plain-old stupid, ignoring every warning sign or doing minimal homework before throwing their money away. This is not to say that Robert Ernst's family deserves no money, but given the facts of his particular case, is his $253 million award against Merck justified? And what does that mean for Merck's future given the 6,000 other Vioxx cases that could be decided in the plaintiff's favor with a similar fact pattern?
Maybe the best solution to the problem is to allow all those average Americans who sit on juries hear what these massive jury awards cost other average Americans. The U.S. Chamber of Commerce estimates that each year legal costs drain $230 billion from the economy. It's known as a "dead-weight cost" because it's merely a transfer of wealth from corporate America to plaintiffs, and disproportionately, their attorneys. Then let them hear how outsized awards can destroy a company that employs tens of thousands of people and may someday find a cure for cancer or AIDS. Maybe then they'll start listening less to lawyers.
Editor's note: Charles Gasparino is leaving NEWSWEEK to become an on-air editor for CNBC's financial news program "Squawk Box." However, he will continue writing his Street Fighting column as a contributor to NEWSWEEK.com.
posted by Chris Placitella at 7:06 AM
0 Comments:
Post a Comment
<< Home