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June 13, 2016

Product Liability Litigation Update—June 2016

A publication of the Product Liability Practice Group

In This Issue:

Delaware Supreme Court Holds That Registration to Do Business Does Not Equal Consent to Jurisdiction

As we reported in a recent Advisory, the Supreme Court of Delaware held in April that foreign corporations registered to do business in the state are no longer deemed to have consented to general personal jurisdiction over all causes of action. Genuine Parts Co. v. Cepec, No. 528, 2015, 2016 WL 1569077 (Del. Apr. 18, 2016). According to the Supreme Court of Delaware, the Genuine Parts decision, which is a substantial departure from the prior rule announced in Sternberg v. O'Neil, 550 A.2d 1105 (Del. 1988), was necessary based on the United States Supreme Court's decisions in Daimler AG v. Bauman, 134 S. Ct. 746 (2014), and Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011), which held that, absent exceptional circumstances, a state may exercise general jurisdiction over a corporation only in the one or two states where it is "at home."

In Genuine Parts, a Georgia couple brought an asbestos lawsuit in Delaware Superior Court against seven corporations, including Genuine Parts. The plaintiffs alleged that the husband was exposed to asbestos while working for the company in Florida. Genuine Parts is a Georgia corporation with its principal place of business in Atlanta. The company does not have corporate offices in Delaware; less than 1% of its workforce is comprised of Delaware residents; less than 1% of its auto-parts stores are located in Delaware; and less than 1% of its revenue is derived from Delaware sales. Plaintiffs alleged Delaware had jurisdiction over the matter solely based on Genuine Parts's compliance with Delaware law requiring the company to register as a foreign corporation and appoint a registered agent for service of process.

Under Sternberg, Delaware had long regarded such registration to be consent to jurisdiction in Delaware for any and all causes of action. But after reviewing the applicable statutes and Sternberg in light of the United States Supreme Court's recent opinion in Daimler, the Court disagreed. It held that nothing in the relevant Delaware statutes required foreign companies operating in Delaware to consent to general personal jurisdiction on a lesser showing than that required by Daimler. Instead, the Court held, the Delaware statutes were better read "as requiring that a foreign corporation have a registered agent that can accept service of process in situations when the very conduct that required registration in the first instance . . . gives rise to a lawsuit."

The Court cautioned that a broader reading of the registration statute could only be considered "unacceptably grasping" and an "exorbitant" exercise of jurisdiction. The Court was concerned that if doing business in Delaware exposed foreign companies to general personal jurisdiction, they may stop doing business in Delaware. The Court also wanted to protect the companies that were sited within Delaware from overreaching by other states as well: because "'grasping' behavior by one can lead to grasping behavior by everyone," the Court feared that other states may apply the same consent analysis to Delaware companies doing business in their borders.

Not every state regards registration to do business as consent to jurisdiction. Genuine Parts reinforces that the Supreme Court's watershed opinion in Daimler calls into question even those states that do.

Delaware High Court: No Causation Where Third-Party Payor Plaintiffs Kept Drugs at Issue on Formularies

The Delaware Supreme Court issued another important opinion this spring, this time affirming dismissal of the claims of third-party payor health insurers (TPPs) against a pharmaceutical manufacturer. Teamsters Local 327 Welfare Fund v. AstraZeneca Pharm. LP, No. 415, 2015, 2016 WL 1465329 (Del. Apr. 12, 2016). TPPs have frequently brought cases against pharmaceutical manufacturers in recent years, claiming that deceptive marketing practices caused them to pay too much for drugs. Under the Teamsters case, though, manufacturers may have a dispositive defense where the drug in question remained on plaintiffs' formulary after the TPP knew of the alleged fraud.

The Teamsters plaintiffs, "on behalf of themselves and a putative nationwide class of TPPs," filed suit in Delaware Superior Court, alleging that AstraZeneca "falsely advertised its more expensive patented prescription drug Nexium as superior to the less expensive generic drug Prilosec, causing the TPPs to overpay for Nexium when generic Prilosec would have sufficed." Relying on choice-of-law analysis from a parallel case in the District of Delaware to find that New York law controlled, the Superior Court dismissed the claims with prejudice because "a physician's expertise in prescribing drugs for a patient's condition broke the causation chain between the advertising and the injury."

The Delaware Supreme Court affirmed. The court found a choice-of-law analysis unnecessary, as both Delaware and New York law required a showing of causation, which could not be established here as a matter of law. Critical to the decision was the fact that the payor continued to keep Nexium on its formulary for years, even after the lawsuit was filed. According to the court, "[u]nder any reasonable interpretation of the statutes, TPPs who continue to pay or reimburse for Nexium, while claiming they were harmed by allegedly false advertising, are neither 'victims' of the allegedly false advertising nor were they injured by reason of or as a result of it." Rather, they were "injured by their own conduct."

Plaintiffs contended that AstraZeneca's alleged fraud drove up the price of the drug, and that plaintiffs were therefore forced to cover the drug due to "advertising pressure directed towards physicians and patients." The court rejected both of these arguments as well, reasoning that: (i) there is no traditional "economic" market for prescription drugs, whose prices are somewhat removed from "the laws of supply and demand"; and (ii) TPPs "can incent physician and patient behavior by not listing a drug on their formularies, or by offering financial incentives to use less expensive and equally effective generic medicines," but here they simply "chose not to do so." For all these reasons, the court affirmed dismissal.

The Teamsters case sets out a strong argument for manufacturer-defendants facing lawsuits from TPPs who maintain on their formularies the drugs at issue. Manufacturers should look for facts like these in any similar case and consider raising this powerful defense as to causation.

Supreme Court Allows Representative Evidence in Tyson Foods Class Action

The Supreme Court addressed class actions again this term, following a series of opinions that reigned in class action abuses. See, e.g., Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011); Comcast v. Behrend, 133 S. Ct. 1426 (2013). In Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016), the Court held that the plaintiffs could rely on representative sampling evidence to fill an "evidentiary gap" and establish classwide liability – at least where such evidence was of the type that might be useable in an individual claim.

Plaintiffs brought a Fair Labor Standards Act claim alleging that their employer deprived them of overtime pay for time spent "donning and doffing" protective equipment at a meat-processing facility. To establish damages, the plaintiffs submitted expert statistical evidence that extrapolated the average time spent donning and doffing based on a sample of the 3,344-member class. The district court certified the class, and the plaintiffs recovered $2.9 million in compensatory damages. The Eighth Circuit affirmed the district court's decision, and the Supreme Court granted certiorari.

The Court declined to apply a bright-line rule barring "sampling" evidence. Justice Kennedy, writing for the majority, reasoned that the permissibility of representative evidence turns not on the form of the proceeding (i.e., an individual versus class action) but on its reliability in proving the elements of a claim. The Court emphasized that in many cases a representative sample is the only practical means to present the relevant data and establish liability. In reaching this result, the court emphasized that Tyson Foods had "fail[ed] to keep adequate records" so the plaintiffs needed the representative evidence to fill the evidentiary gap. The Court also explained that in this case, the proof would have been equally useable had the class members' claims been brought as individual lawsuits. That is, if an individual had brought a case on his or her own behalf seeking damages, he or she could have used the same expert evidence to make out a damages claim in the absence of actual time records.

Although the Tyson Foods plaintiffs prevailed, the decision suggests that plaintiffs may still face multiple bars to using representative proof to establish their claims. To begin with, the proof must still be reliable in the conventional sense so as to survive a Daubert challenge. But the opinion also suggests that under the Rules Enabling Act, plaintiffs must establish that representative evidence would be equally admissible in an individual action. In other words, plaintiffs may not use the class action device to prove their claims through means that would not be competent in individual actions. Companies should pay close attention to how lower courts treat representative evidence post-Tyson Foods.

Oregon Court Finds FDA Food Labeling Regulations Preempt State Consumer Protection Suit

A district court in Oregon recently concluded that the Food, Drug, and Cosmetic Act (FDCA) food labeling requirements preempted a lawsuit brought under state consumer protection law, claiming misleading labeling of a food product. In Henry v. Gerber Products Co., No. 3:15-CV-02201-HZ, 2016 WL 1589900 (D. Or. Apr. 18, 2016), a mother sued under Oregon's Unfair Trade Practices Act, alleging that Gerber's labels for its Puffs cereal products are misleading. The Puffs labels prominently feature pictures of fruits or vegetables, but the Puffs do not actually contain those ingredients. The plaintiff alleged that the depiction of fruits and vegetables leads consumers to believe that the Puffs contain those ingredients, not that the Puffs are merely flavored as those fruits and vegetables.

The FDCA establishes extensive and specific food labeling regulations. Relevant here, the FDCA mandates that labels list "the common or usual name" of ingredients other than spices, coloring, or flavoring and that labels disclose if foods contain artificial flavors. Regulations permit a manufacturer to indicate the "characterizing flavor" of a food product, such as a fruit flavor, and describe in detail how labels must report such flavorings. In addition, the Act explicitly preempts most state food labeling requirements if they are not identical to the federal requirements. However, the FDCA preemption clause does not explicitly state whether it encompasses the FDCA's "catch-all" provision, which lists various ways that a food may be misbranded, including "if its labeling is false or misleading in any particular." 21 U.S.C. § 343(a).

As a result, a 2010 decision in the Central District of California held that state-law based mislabeling claims are not preempted under Section 343(a). At issue in Zupnik v. Tropicana Products, Inc. was the label of Tropicana Pure 100% Juice Pomegranate Blueberry Flavored Blend of 5 Juices from Concentrate with other Natural Flavors, which included pictures of pomegranates and blueberries and emphasized these fruits in larger font than other parts of the product name. See No. CV 09-6130 DSF (RZx), 2010 WL 6090604 (C.D. Cal. Feb. 1, 2010). The court reasoned that Section 343(a) permitted suit "for a 'false or misleading' label where the label does not violate another, more specific food labeling statute or regulation."

In the Henry case, Judge Marco Hernandez rejected the Zupnik court's reasoning and concluded that the FDCA preempted Henry's state-law consumer protection claim. The court reasoned that the Zupnick outcome failed to recognize the broader meaning of the overall statutory scheme. Section 343 must be understood in the context of the FDCA's other labeling requirements – including those that clearly allow companies to use images to represent a fruit flavor, even if the product does not contain the actual ingredient. Because a manufacturer can represent the primary flavor of a food product with an image, such an image does not render a product "misbranded." Any claim under state law arguing otherwise is preempted.

This division of authority is clearly important for any food manufacturer facing potential lawsuits about labeling claims. But the preemption issue also offers lessons for any company operating in a heavily-regulated industry. Where preemption provisions do not explicitly cover all aspects of a regulatory scheme, companies may find themselves in the position of defending against state-law suits that fall between the cracks. Decisions like Henry indicate an understanding about how a system of regulations works together – yet not all courts demonstrate this same familiarity. Companies facing these suits should make sure in their briefing and argument to help courts understand the regulatory scheme as a whole and interpret preemption provisions in light of their statutory context.

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