            09-0222-cv
            In re: Zyprexa Products Liability Litigation



 1                                          UNITED STATES COURT OF APPEALS
 2                                                F OR THE S ECOND C IRCUIT
 3
 4
 5                                                            August Term, 2009
 6
 7                          (Argued: December 8, 2009                   Decided: September 10, 2010)
 8
 9                                                          Docket No. 09-0222-cv
10
11
12            UFCW L OCAL 1776 and participating employers health and welfare fund, E RIC
13    T AYAG and M ID-W EST N ATIONAL L IFE INSURANCE C OMPANY OF T ENNESSEE, on behalf
14   of themselves and others similarly situated, L OCAL 28 S HEET M ETAL W ORKERS, on behalf
15      of themselves and others similarly situated, S ERGEANTS B ENEVOLENT A SSOCIATION
16      H EALTH AND W ELFARE F UND, on behalf of themselves and others similarly situated,
17
18                                                                                        Plaintiffs-Appellees,
19
20                                                                  — v.—
21
22                                                         E LI L ILLY AND C OMPANY,
23
24                                                                                       Defendant-Appellant,
25
26                                    T EXAS D EPARTMENT OF S TATE H EALTH S ERVICES,
27
28                                                                                                 Defendant.*
29
30
31          B e f o r e:
32
33                                     KATZMANN , LIVINGSTON , and LYNCH , Circuit Judges.
34
35                                                           __________________

            *
               The Clerk of Court is directed to amend the official caption in this case to conform to
     the listing of the parties above.
 1          Plaintiffs-appellees brought a putative class action against Eli Lilly, manufacturer

 2   of the drug Zyprexa. The putative class asserted a civil RICO violation predicated on

 3   mail fraud, conspiracy to violate RICO, violation of state consumer protection laws,

 4   common-law fraud, and unjust enrichment based on Lilly’s alleged misrepresentations

 5   about Zyprexa’s efficacy and safety. Lilly seeks review of a certification of a plaintiff

 6   class and denial of its motion for summary judgment by the United States District Court

 7   for the Eastern District of New York (Jack B. Weinstein, Judge).

 8                 Reversed and remanded for further proceedings.

 9
10
11                        S AMUEL ISSACHAROFF, New York, New York; James R. Dugan,
12                        Stephen Murray, Jr., Douglas R. Plymale (on the brief), Murray Law
13                        Firm, New Orleans, Louisiana; Thomas M. Sobol, Lauren G. Barnes,
14                        Kristen J. Parker (on the brief), Hagens Berman Sobol Shapiro LLP,
15                        Cambridge, Massachusetts; Andrea Bierstein (on the brief), Hanly
16                        Conroy Bierstein Sheridan Fisher & Hayes LLP, New York, New
17                        York, for Plaintiffs-Appellees.
18
19                        R OBERT A. L ONG (Michael X. Imbroscio, Jonathan L. Marcus, Mark
20                        W. Mosier, on the brief), Covington & Burling LLP, Washington,
21                        D.C.; Nina M. Gussack, Thomas E. Zemaitis, Anthony Vale, Paul V.
22                        Avelar (on the brief), Pepper Hamilton LLP, Philadelphia,
23                        Pennsylvania, for Defendant-Appellant.
24

25

26   G ERARD E. L YNCH, Circuit Judge:

27          Plaintiffs-appellees (“plaintiffs”), unions and insurers who act as third-party payors


                                                   2
 1   (“TPPs”) who underwrite the purchase of prescription drugs by their members or insureds,

 2   brought this putative class action against Eli Lilly and Company (“Lilly”), manufacturer of

 3   the drug Zyprexa, alleging that Lilly had misrepresented Zyprexa’s efficacy and side effects

 4   to physicians. The putative class is composed of TPPs, such as insurance providers, that paid

 5   for Zyprexa prescriptions. Plaintiffs argued that class members were injured in two ways:

 6   first, by paying for Zyprexa prescriptions that would not have been issued but for the alleged

 7   misrepresentations; and second, by paying a higher price for Zyprexa than would have been

 8   charged absent the alleged misrepresentations. The district court certified a class of TPPs

 9   under the second theory. This appeal followed.

10                                          B ACKGROUND

11   I. Facts

12          A. Development and Approval of Zyprexa

13          Zyprexa, the brand name for the drug olanzapine, is a prescription medicine

14   produced by Lilly. The FDA approved Zyprexa for treatment of schizophrenia in 1996,

15   and later approved it for treatment of certain symptoms of bipolar disorder.

16          The first wave of medications commonly prescribed to treat schizophrenia are

17   known as first-generation antipsychotics (“FGAs”). The FGAs are a group of about ten

18   drugs first used in the 1950s. FGAs often cause significant side effects, such as a

19   movement disorder called tardive dyskinesia, and have limited efficacy. Zyprexa is one



                                                   3
 1   of a small group of medications known as second-generation antipsychotics (“SGAs”).

 2   The first SGA, approved by the FDA in 1989, was Clozaril, followed by Risperdal in

 3   1993, and Zyprexa in 1996. After Zyprexa’s approval, the FDA approved three

 4   additional SGAs: Seroquel in 1997, Geodon in 2001, and Abilify in 2002.

 5          B. Side Effects and Efficacy

 6          Plaintiffs allege that as Zyprexa was developed, Lilly became aware of harmful

 7   side effects associated with the drug that it did not disclose to patients once Zyprexa went

 8   on the market. Plaintiffs presented evidence to the district court that they argue supports

 9   this conclusion. For example, studies performed by Lilly in the early 1990s indicated that

10   Zyprexa was strongly associated with weight gain, with participants in a 1993 study

11   gaining on average 1.5 pounds per week. In a 1995 report prepared for submission to the

12   FDA, Lilly noted that almost thirty percent of the patients in approximately fifty studies

13   of Zyprexa reported significant weight gain.

14          Plaintiffs also allege that Lilly fraudulently claimed that Zyprexa was more

15   effective than other SGAs on the market. In order to gain FDA approval, drug

16   manufacturers need only show that a drug is more effective than a placebo in treating the

17   indication for which approval is sought; it is not necessary to show superiority to other

18   available drugs. Lilly submitted two studies to the FDA that showed that Zyprexa was

19   better than a placebo in treating schizophrenia. Plaintiffs claim to have presented



                                                    4
 1   evidence demonstrating that Lilly falsely marketed the drug to physicians as not merely

 2   effective, but as superior to other available medications for treating schizophrenia.

 3          Prior to its approval of Zyprexa, the FDA recommended that Lilly include

 4   information about possible weight gain in the “Precautions” section of Zyprexa’s label.

 5   Lilly successfully argued that weight gain should be listed instead in the “Adverse

 6   Reactions” sections, thus effectively deemphasizing the significance of weight gain as a

 7   possible side effect. Shortly after Zyprexa’s launch, the FDA sent Lilly a warning letter

 8   stating that a teleconference led by Lilly’s Research Laboratories Vice President Dr. Gary

 9   Tollefson, in which Dr. Tollefson implied that Zyprexa was more effective than other

10   SGAs and had fewer side effects, was “false and misleading.” The warning letter singled

11   out as misleading a statement in which Tollefson argued that because the instances of

12   weight gain occurred in many patients with relatively low starting weights, the weight

13   gain was “a therapeutic recovery rather than an adverse event.”

14          Four years later, Lilly sought and received FDA approval for Zyprexa as a

15   treatment for bipolar disorder, and for expanding the contexts in which it could be

16   prescribed to treat schizophrenia. The FDA approved Zyprexa for the treatment of

17   bipolar disorder in early 2000, and for the ongoing maintenance of schizophrenia in

18   October of the same year. As a condition of being approved for maintenance treatment of

19   schizophrenia, the FDA required Lilly to articulate the narrow indications for which



                                                   5
 1   Zyprexa was approved on the drug’s label and to list “diabetic coma” under Adverse

 2   Reactions.

 3          In early 2000, European regulatory agencies asked Lilly to provide information

 4   about Zyprexa’s side effects. In May of that year, the FDA asked Lilly to review its

 5   studies and summarize information linking Zyprexa to hyperglycemia and diabetes.

 6   Confidential internal Lilly documents indicate that Lilly was aware that patients taking

 7   Zyprexa had an increased risk of hyperglycemia, although Lilly did not understand the

 8   mechanism of the association. Lilly was also aware that patients taking Zyprexa were

 9   more likely to gain weight, a problem given the connection between obesity and diabetes.

10   In November 2000, the Malaysian Regulatory Authority requested that Lilly notify

11   Malaysian physicians outlining the increased risk of hyperglycemia associated with

12   Zyprexa.

13          In 2002, Japan’s Ministry of Health and Welfare required Lilly to send an

14   “Emergency Safety Information” letter to physicians in Japan alerting them to the risk of

15   hyperglycemia and diabetic ketoacidosis among Zyprexa users. The Japanese agency also

16   required that Zyprexa’s label include instructions to physicians to monitor blood glucose

17   levels. After the warning was included on the label, the number of new patients

18   prescribed Zyprexa dropped by seventy-five percent. The same year, Mexico asked Lilly

19   to change Zyprexa’s package inserts regarding hyperglycemia, and Australia required



                                                  6
 1   Zyprexa’s label be changed to reflect the increased risk of diabetes.

 2          In 2003, the FDA agreed that Lilly should add pancreatitis as an adverse reaction

 3   on Zyprexa’s label. That same year, Zyprexa was approved for the treatment of bipolar

 4   mania in Canada with a statement specifically warning of increased risk of

 5   hyperglycemia, diabetes, and weight gain. European regulators also required that the

 6   European label be modified to highlight the risk of diabetes.

 7          In September 2003, the FDA required Lilly and all other SGA manufacturers to

 8   add a warning concerning hyperglycemia and diabetes to SGA labels. In May 2005, the

 9   FDA required the manufacturers of the SGAs Zyprexa, Risperdal, Seroquel, and Abilify

10   to add a black box warning to their labels concerning the increased risk of death in elderly

11   patients taking those drugs for dementia.

12          C. Pricing

13                 1. The Market for Prescription Drugs

14          The market for prescription drugs is quite inelastic, meaning that the price of a

15   medication rarely has significant impact on the demand for that medication. This is

16   particularly true of medications used to treat psychiatric disorders.

17          The initial price set by a pharmaceutical company is “sticky” in that the price does

18   not respond to market demand. Rather, the price is generally increased over time as a

19   routine matter by the manufacturer. The limited monopolies granted by patents on drugs



                                                   7
 1   and brand loyalty of patients and physicians result in a core group of consumers who will

 2   buy a successful drug consistently. Even if negative information is released about a

 3   medication, the demand for the drug may go down, but the price generally remains the

 4   same. A drug company may even increase the price of a drug when it is expected that

 5   negative information will lower the demand, so that the price increase will compensate

 6   for the decrease in quantities sold and the overall profits of the company will not fall.

 7          Lilly produced an expert witness before the district court to describe how

 8   manufacturers set the price of a new prescription drug. Dr. Eugene M. Kolassa

 9   established a set of pricing guidelines that have been widely adopted by drug

10   manufacturers. According to Dr. Kolassa, drug manufacturers consider factors including

11   the following:

12                 1.     The existence and price of competitive products and the
13                        pricing behavior of the firms that sell them (i.e., how
14                        competitor[s] respond to pricing actions).
15                 2.     The clinical, economic and social value offered by the
16                        medicine, both substantively and in economic terms.
17                 3.     Plaintiff population characteristics, such as age, common co-
18                        morbidities, and prescription drug coverage.
19                 4.     The factors that physicians will likely consider in determining
20                        whether to prescribe the medicine, and the degree to which
21                        the price may affect that decision.
22                 5.     Disease characteristics (e.g., chronic or acute; debilitating or
23                        cosmetic).
24                 6.     The reimbursement environment – how a product is likely to
25                        be reimbursed by payors – and issues in the specific market
26                        for the product.
27                 7.     Public relations and public policy concerns over pricing.


                                                   8
 1                  8.    The needs and ability of the manufacturer, including overall
 2                        corporate strategy, market positioning for future performance,
 3                        and the availability of internal resources to support its pricing
 4                        strategy.
 5
 6          Once the price of a new drug entering the market is established, individual

 7   transactions are also significantly different than transactions for typical consumer goods.

 8   The market for prescription drugs is unusual in that direct exchanges between consumers

 9   and producers are rare. An individual patient does not choose what drug to take; she is

10   prescribed a drug by her physician. Nor does the individual patient always pay directly

11   for that drug. Rather, a TPP, such as her insurance provider, often pays some or all of the

12   drug’s cost.

13          TPPs typically pay for a prescribed medication only if the drug is authorized under

14   their formulary, a list of medications approved for payment. The formulary is usually

15   managed by a Pharmacy Benefit Manager (“PBM”). PBMs manage approximately

16   seventy-five percent of all outpatient drug claims. Drugs placed on a formulary are

17   approved by the PBM’s Pharmacy and Therapeutics Committee, made up of physicians

18   and clinical pharmacists. PBMs maintain their formulary based upon publicly available

19   clinical information, which is in large part produced and disseminated by the drug

20   manufacturers themselves. TPPs have the right to customize their formulary beyond what

21   the PBMs advise, but in practice TPPs rarely modify the recommendations of their PBMs.

22   On the rare occasions when a TPP customizes its formulary, it generally does so in


                                                  9
 1   consultation with the PBM’s Pharmacy and Therapeutics Committee.

 2          As the district court observed, in the market for prescription drugs three sets of

 3   price negotiations exist: “(1) retail pharmacies and nonretail providers negotiate with

 4   pharmaceutical manufacturers and wholesalers, (2) payors (often through PBMs)

 5   negotiate with pharmaceutical manufacturers and wholesalers, and (3) payors negotiate

 6   with retail pharmacies and nonretail providers.” The negotiations over price, moreover,

 7   do not intersect with the therapeutic choice of what drug a patient should take, which is a

 8   decision made by a physician with only minimal input by her patient or the TPP.

 9   Physicians generally do not take the price of a drug into account when deciding among

10   treatment options, and often do not even know the price of the drugs they prescribe. This

11   is particularly true in the treatment of mental disorders, which is an extremely

12   individualized process. Patients respond to antipsychotic drugs in an individualized

13   manner, and patients with the same disease may respond to the same medication in very

14   different ways. Even similar drugs – SGAs, for example – may have varying levels of

15   success with the same patient. As a result, PBMs are reluctant to exclude antipsychotic

16   drugs from their formularies, or to place financial conditions on their use. For example,

17   state Medicaid plans often exempt antipsychotic drugs from requirements such as

18   preferred drug lists and prior authorization provisions.




                                                  10
 1                 2. The Pricing of Zyprexa

 2          At the time of Zyprexa’s launch, the only other SGAs approved by the FDA were

 3   Clozaril and Risperdal. Clozaril, a very powerful antipsychotic, had serious, even

 4   potentially fatal, side effects. Risperdal caused a greater incidence than Zyprexa of so-

 5   called “extrapyramidal” side effects, causing symptoms such as muscle tremors, slurred

 6   speech, and other movement disorders. When Lilly considered what initial price to set for

 7   Zyprexa, it weighed Zyprexa’s efficacy and side effects against those of Clozaril and

 8   Risperdal and set Zyprexa at a higher price. One doctor who discussed the launch price

 9   with Lilly before Zyprexa was put on the market recalled a Lilly senior employee

10   explaining the higher price as “premium drug, premium price,” meaning that Zyprexa’s

11   high price was justified by its assertedly superior performance as compared to the other

12   antipsychotic drugs then on the market. Lilly set Zyprexa’s initial prescription price $77

13   higher than the cost of either Clozaril or Risperdal.

14          After Zyprexa’s launch, its per-prescription price was increased regularly, which

15   was consistent with internal Lilly policies. Zyprexa’s price increased from approximately

16   $188 per prescription in 1996 to $292 in 2003 and $368 in 2006. Other SGAs did not

17   increase their price at a similar rate – by the calculations of one expert witness presented

18   to the district court, the difference between the cost of Zyprexa and that of its three main

19   competitors increased from $77 per prescription in 1996 to $113 in 2003 and $150 in



                                                  11
 1   2006.

 2           D. Marketing and Off-Label Prescriptions

 3           In late 2000, Lilly began marketing Zyprexa to primary-care physicians. This shift

 4   was important because previously Zyprexa had been targeted to – and was almost

 5   exclusively prescribed by – psychiatrists, who treat patients with severe mental disorders

 6   such as schizophrenia and bipolar disorder, the two indications for which Zyprexa was

 7   approved. Primary-care physicians, by contrast, treat patients for more common, and

 8   often less severe, disorders such as anxiety, depression, and dementia.

 9           Although the FDA approves drugs for treatment of specific diseases, physicians

10   may legally prescribe drugs, in their clinical judgment and discretion, for treatment of

11   other diseases or disorders. This practice is known as “off-label” use. See Buckman Co.

12   v. Plaintiffs’ Legal Comm., 531 U.S. 341, 350 (2001). While off-label prescriptions are

13   permitted within a physician’s discretion, drug manufacturers are prohibited from

14   promoting off-label uses in marketing a drug. Plaintiffs argue that Lilly shifted its

15   marketing efforts to primary-care physicians with the intention of marketing off-label

16   prescriptions of Zyprexa for such conditions as anxiety, depression, and dementia.

17           Lilly’s marketing campaign targeting primary-care physicians was known as “Viva

18   Zyprexa.” Lilly internally announced “Viva Zyprexa” in March 2001. The campaign

19   focused on prescribing Zyprexa to treat isolated symptoms not tied to a clinical diagnosis,



                                                  12
 1   rather than treatment of the specific conditions – bipolar disorder and schizophrenia – for

 2   which Zyprexa had been approved by the FDA. For example, Lilly created profiles of

 3   hypothetical patients as examples of patients who could be treated with Zyprexa. One

 4   such hypothetical patient was Donna, “a single mom in her mid-30s appearing in your

 5   office in drab clothing and seeming somewhat ill at ease. Her chief complaint is that she

 6   feels anxious and irritable.” Lilly suggested that sales representatives say that “when we

 7   look at efficacy in a patient like Donna, Zyprexa has been shown to improve mood,

 8   anxiety levels, and disrupted sleep patterns. . . . [W]hat Zyprexa will mean to a patient

 9   like Donna is that she will have less anxiety, less irritability and be able to sleep better.”

10   Notably, the materials do not state that Donna was diagnosed with bipolar disorder or

11   schizophrenia, the two conditions that the FDA approved Zyprexa to treat.

12          Another hypothetical patient, “Martha,” posited residents of nursing homes as

13   ideal candidates for Zyprexa prescriptions. Lilly assigned 280 representatives to a “long-

14   term care” sales force aimed at “driv[ing] the nursing home business.” Internal

15   documents stated that Lilly’s number one strategy was to “establish Zyprexa as a first line

16   choice in the treatment of the elderly patient who are [sic] experiencing behavior or

17   cognitive symptoms.” Lilly pursued this market, suggesting Zyprexa as beneficial for

18   patients suffering from dementia, even though no evidence existed that Zyprexa was an

19   effective treatment for dementia and Zyprexa had detrimental effects on the cognitive



                                                    13
 1   functioning of patients with Alzheimer’s.

 2          Lilly also distributed a “Mood Disorder Questionnaire” (“MDQ”) to primary-care

 3   physicians. The questionnaire asked a series of yes or no questions resulting in a positive

 4   or negative screen. Although screening tests are not diagnostic instruments and do not

 5   suggest treatment, and the MDQ was not sensitive enough to diagnose bipolar disorder

 6   (much less the limited types of bipolar disorder for which Zyprexa was approved), the

 7   MDQ became a significant source of Zyprexa prescriptions.

 8          By 2002, almost two-thirds of Zyprexa prescriptions for bipolar disorder were for

 9   off-label uses. It is unlikely that TPPs paying for prescriptions were aware of the

10   increased rate of off-label prescriptions at the time, as PBMs generally do not track off-

11   label prescriptions of a drug. Such tracking is only possible if the drug is subject to a

12   prior authorization program; such programs are in place for fewer than two percent of

13   prescriptions (and are not common with respect to antipsychotic medication).

14          E. Sales

15          After the label change in September 2003, consumption of Zyprexa decreased.

16   The peak of Zyprexa prescriptions occurred in 2003, when 11.092 million prescriptions

17   were issued. In 2004, the number of Zyprexa prescriptions fell to 9.765 million, and

18   prescriptions in 2006 were projected to fall still further to 6.901 million. A 2008 New

19   York Times article stated that prescriptions of Zyprexa decreased fifty percent between



                                                  14
 1   2003 and 2008. Plaintiffs offered evidence to show that the decline in Zyprexa

 2   prescriptions corresponds “almost entirely” to a drop in off-label prescriptions, leaving

 3   only the prescriptions for the approved indications.

 4   II. Procedural Posture

 5          On June 20, 2005, Mid-West National Life Insurance Company of Tennessee filed

 6   a putative class action against Lilly. Similar suits were brought by other TPPs and

 7   individuals in the following months. The plaintiffs ultimately brought five claims in a

 8   consolidated amended complaint: a civil RICO claim predicated on mail fraud, conspiracy

 9   to violate RICO, violation of state consumer protection laws, common-law fraud, and

10   unjust enrichment. These claims were based on the plaintiffs’ contention that Lilly made

11   false statements and omitted material information concerning the safety and efficacy of

12   Zyprexa. The plaintiffs asserted that Lilly withheld information concerning the risk of

13   weight gain, hyperglycemia, and diabetes among people taking Zyprexa, and produced

14   and disseminated false information minimizing or even denying those risks. The

15   plaintiffs also argued that Lilly falsely claimed that Zyprexa was more effective than

16   other available antipsychotics, and promoted off-label prescriptions for Zyprexa to treat

17   conditions such as depression, anxiety, and dementia, for which there was no evidence

18   that Zyprexa provided any effective treatment. These misrepresentations, the plaintiffs

19   argued, resulted in a higher price and greater demand for Zyprexa than would have



                                                  15
 1   existed had accurate information about Zyprexa’s efficacy and risks been known.

 2          The plaintiffs offered two theories of damages. First, the “quantity effect” theory

 3   posited that improper promotion of off-label use for Zyprexa resulted in more off-label

 4   prescriptions for Zyprexa than would otherwise have been written. The TPPs thus were

 5   harmed by paying for Zyprexa that would not have been prescribed but for Lilly’s

 6   marketing efforts promoting Zyprexa as a treatment for conditions other than those for

 7   which Zyprexa had been approved by the FDA. Second, under the “loss-of-value” or

 8   “excess price” theory, the claimed harm was the monetary difference between what the

 9   plaintiff class was allegedly led to believe Zyprexa was worth and the actual economic

10   value of Zyprexa, taking into account the lesser efficacy and greater harmful side effects

11   allegedly hidden or misrepresented by Lilly. Dr. Meredith Rosenthal, plaintiffs’ expert

12   witness, estimated the damages under this excess price theory for the putative class period

13   September 1, 1996 to December 31, 2006 as between $4 billion and $7.7 billion. Dr.

14   Jeffrey E. Harris, another expert witness for the plaintiffs, estimated damages from both

15   theories as approximately $5 billion.

16          Plaintiffs sought to certify a class to recover the value of their overpayments. They

17   proposed one class – the Purchase Claim Plaintiff Class – comprising two subclasses: the

18   Third-Party Payor Subclass and the Consumer or Direct Payor Subclass. The two

19   subclasses could then be further subdivided based on off-label or “on-label” purchases.



                                                 16
 1   Plaintiffs defined the proposed class as:

 2                 All individuals and entities in the United States and its territories
 3                 who, for purposes other than resale, purchased, reimbursed, and/or
 4                 paid for Zyprexa during the period from September 1996 through the
 5                 present. For purposes of the Class definition, individuals and entities
 6                 “purchased” Zyprexa if they paid for some or all of the purchase
 7                 price.
 8
 9   The Third-Party Payor Subclass was defined as:

10                 All private, non-government entities in the United States and its
11                 territories that are at risk, pursuant to a contract, policy, or plan, to
12                 pay or reimburse all or part of the cost of Zyprexa prescribed,
13                 provided, or administered to natural persons covered by such
14                 contract, policy, or plan during the period from January 1, 1996 to
15                 the present.
16
17          Lilly moved for summary judgment on the ground that plaintiffs could not satisfy

18   the elements of any of their claims. Specifically, Lilly argued that plaintiffs’ reliance on

19   aggregate proof of reliance, rather than individualized proof, was impermissible, and that

20   the plaintiffs could not show a sufficient causal link between Lilly’s actions and the

21   alleged overpricing harm.

22          The district court, addressing only plaintiffs’ excess price theory, denied Lilly’s

23   motion for summary judgment on June 28, 2007. The court concluded that the “broad-

24   based” nature of Lilly’s alleged scheme, and Lilly’s ability to “distort[] the general body

25   of knowledge about Zyprexa,” made aggregate proof of reliance permissible. The court

26   also found triable issues of fact relating to causation because Lilly’s allegedly false



                                                    17
 1   representations and material omissions could have increased the price of and demand for

 2   Zyprexa by leading “doctors to continue to prescribe, and plaintiffs to continue to pay for,

 3   greater amounts . . . than they would have absent the fraud,” ultimately resulting in

 4   additional costs to plaintiffs.

 5          The district court held a hearing in early 2008 on plaintiffs’ motion to certify a

 6   class. On September 5, 2008, the court certified a class of TPPs on the RICO claims

 7   predicated on the overpricing theory of damages, but refused to certify a class of

 8   individual payors or to certify a class as to the state consumer protection claims. The

 9   district court limited the class period from June 20, 2001 to June 20, 2005.

10          The court concluded that the proposed TPP class presented common questions of

11   law and fact because “[t]he only difference among class third-party payors is how much

12   of the total overcharge each shall receive in damages.” The court first addressed whether

13   the losses suffered by the class could be established with sufficient precision. The court

14   concluded that

15                  Assuming fraud leading to a price differential has been established,
16                  damages may be estimated based on the difference between what
17                  was paid for Zyprexa and the actual value of the product. The
18                  computation requires (i) estimating the total out-of-pocket
19                  expenditures for the class members and (ii) using well-accepted
20                  techniques in applied economics to determine the actual value or
21                  appropriate launch price (plus minor increases) of Zyprexa.
22
23   The district court also found that reliance could be proven for the class because the



                                                  18
 1   alleged fraud was “directed through mailings and otherwise at doctors who relied, causing

 2   damages in overpayments by plaintiffs.” This, the district court concluded, could

 3   appropriately be shown by generalized proof, in contrast to the more abstract “fraud on

 4   the market” theory rejected in McLaughlin v. Am. Tobacco Co., 522 F.3d 215 (2d Cir.

 5   2008).

 6            After approving the plaintiff class, the district court certified its order denying

 7   summary judgment under 28 U.S.C. 1292(b), and Lilly moved for leave to appeal. Lilly

 8   also moved under Federal Rule of Civil Procedure 23(f) for leave to appeal the district

 9   court’s order certifying the class. This Court granted Lilly’s petition, and this appeal

10   followed.

11                                             D ISCUSSION

12   I. Standard of Review

13            We review denial of summary judgment de novo. See Tasini v. N.Y. Times Co.,

14   206 F.3d 161, 165 (2d Cir. 2000). We review the district court’s decision to certify a

15   class for abuse of discretion. See Parker v. Time Warner Entm’t Co., 331 F.3d 13, 18 (2d

16   Cir. 2003). To the extent that the district court’s decision as to class certification is

17   premised on a finding of fact, we review that finding for clear error. See In re Initial Pub.

18   Offerings Sec. Litig., 471 F.3d 24, 40-41 (2d Cir. 2006).




                                                     19
 1   II. Class Certification

 2          Under Rule 23(b)(3), Fed. R. Civ. P., “[a] class action may be maintained if Rule

 3   23(a) is satisfied and if . . . the court finds that the questions of law or fact common to

 4   class members predominate over any questions affecting only individual members,” and

 5   that a class action is superior to other methods of adjudication for fairness and efficiency.

 6   The parties agree that the requirements of Rule 23(a) are satisfied,1 but dispute whether

 7   common questions “predominate.” “Class-wide issues predominate if resolution of some

 8   of the legal or factual questions that qualify each class member’s case as a genuine

 9   controversy can be achieved through generalized proof, and if these particular issues are

10   more substantial than the issues subject only to individualized proof.” Moore v.

11   PaineWebber, Inc., 306 F.3d 1247, 1252 (2d Cir. 2002). To determine whether the

12   proposed TPP class was properly certified, therefore, we must consider whether

13   substantial elements of its claim against Lilly may be established by generalized, rather

14   than individualized, proof.

15          We first briefly outline the substance of plaintiffs’ claims against Lilly. The

16   putative class of TPPs alleges that in the course of promoting off-label prescriptions of



            1
               Under Rule 23(a), a proposed class must (1) be “so numerous that joinder of all
     members is impracticable,” (2) present “questions of law or fact common to the class,” (3) be
     represented by parties whose claims or defenses are “typical to the claims or defenses of the
     class,” and (4) be represented by parties who “will fairly and adequately protect the interests of
     the class.” See Fed. R. Civ. P. 23(a).

                                                      20
 1   Zyprexa, Lilly engaged in mail and wire fraud by deliberately misrepresenting the drug’s

 2   safety and efficacy. Plaintiffs claim that Lilly thereby conducted a racketeering

 3   enterprise, which they called “the Off-Label Promotion Enterprise,” in violation of RICO.

 4   There is no real dispute that whether or not the substance of that claim is true, it is a

 5   unitary claim that is common to the putative class.

 6          In order to recover damages under RICO, however, a plaintiff must show “(1) a

 7   substantive RICO violation under § 1962; (2) injury to the plaintiff’s business or property,

 8   and (3) that such injury was by reason of the substantive RICO violation.” City of New

 9   York v. Smokes-Spirits.com, Inc., 541 F.3d 425, 439 (2d Cir. 2008), overruled on other

10   grounds by Hemi Group, LLC v. City of New York, 130 S. Ct. 983 (2010) (internal

11   quotation marks omitted) (holding that City’s asserted injury – inability to collect taxes

12   due to failure by out-of-state cigarette sellers to file records with state officials as required

13   by federal law – did not give rise to RICO claim because injury was not caused by reason

14   of allegedly fraudulent conduct). Plaintiffs argue that Lilly injured them because (1) they

15   paid for Zyprexa prescriptions that would not have been written absent the fraud (the

16   quantity effect theory) and (2) they paid too much for Zyprexa prescriptions because Lilly

17   relied upon the fraud to set an excessively high price (the excess price theory). While

18   there is no dispute that the existence of a RICO violation is a question common to all

19   class members, Lilly disputes that the second and third elements required to recover



                                                    21
 1   damages – proof of an injury and proof that such injury was by reason of the RICO

 2   violation – are common to the proposed class.

 3          In order to pursue their claims as a class rather than as individual plaintiffs, the

 4   putative class must be able to prove its theory of injury through generalized proof. Here,

 5   the district court found that the plaintiff class could appropriately use generalized proof to

 6   show that Zyprexa was overpriced as a result of Lilly’s “excessive claims of utility as

 7   well as disavowal of adverse secondary effects” of Zyprexa.

 8          To show injury by reason of a RICO violation, a plaintiff must demonstrate that the

 9   violation caused his injury in two senses. First, he must show that the RICO violation was the

10   proximate cause of his injury, meaning “there was a direct relationship between the plaintiff’s

11   injury and the defendant’s injurious conduct.” First Nationwide Bank v. Gelt Funding Corp., 27

12   F.3d 763, 769 (2d Cir. 1994). Second, he must show that the RICO violation was the but-for (or

13   transactional) cause of his injury, meaning that but for the RICO violation, he would not have

14   been injured. See Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258, 268 (1992).

15          Until recently, this Court required a RICO plaintiff asserting predicate acts of

16   fraud to show first-person reliance – “that he relied on the defendant’s misrepresentation”

17   – in order to demonstrate but-for causation. McLaughlin, 522 F.3d at 222. In Bridge v.

18   Phoenix Bond & Indemnity Co., however, the Supreme Court held that a plaintiff alleging

19   a RICO mail fraud is not required to show first-person reliance. 128 S. Ct. 2131, 2134



                                                     22
 1   (2008). The Court rejected reliance as an element of the RICO fraud claim, either to

 2   show but-for causation or to establish a direct relationship between the defendant’s

 3   conduct and the plaintiff’s injury sufficient to demonstrate proximate causation. Id. at

 4   2144. The Court explained further:

 5                 Of course, none of this is to say that a RICO plaintiff who alleges
 6                 injury “by reason of” a pattern of mail fraud can prevail without
 7                 showing that someone relied on the defendant’s misrepresentations.
 8                 In most cases, the plaintiff will not be able to establish even but-for
 9                 causation if no one relied on the misrepresentation. . . .
10                        Accordingly, it may well be that a RICO plaintiff alleging
11                 injury by reason of a pattern of mail fraud must establish at least
12                 third-party reliance in order to prove causation. “But the fact that
13                 proof of reliance is often used to prove an element of the plaintiff’s
14                 cause of action, such as the element of causation, does not transform
15                 reliance itself into an element of the cause of action.” . . . Proof that
16                 the plaintiff relied on the defendant’s misrepresentations may in
17                 some cases be sufficient to establish proximate cause, but there is no
18                 sound reason to conclude that such proof is always necessary.

19   Id., quoting Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 478 (2006) (Thomas, J.,

20   concurring in part and dissenting in part) (internal citation omitted).

21          Plaintiffs argue that there is therefore no reliance requirement under RICO. We

22   recently addressed whether RICO requires a showing of reliance by any party:

23                 [T]he Supreme Court noted that “it may well be that a RICO plaintiff
24                 alleging injury by reason of a pattern of mail fraud must establish at
25                 least third-party reliance in order to prove causation,” and that there
26                 may be situations where the “complete absence of reliance may
27                 prevent the plaintiff from establishing proximate cause.” Here, there
28                 is no question that the City has alleged third-party reliance . . . .


                                                   23
 1                 Thus, as we find that the City has adequately alleged proximate
 2                 cause and third-party reliance, we need not address the question of
 3                 whether an allegation of proximate cause fails where there are
 4                 absolutely no allegations of reliance.
 5
 6   Smokes-Spirits.com, 541 F.3d at 444 n.24, quoting Phoenix Bond & Indem. Co., 128 S.

 7   Ct. at 2144-45 (internal citation omitted). We find ourselves in a similar position here:

 8   while reliance may not be an element of the cause of action, there is no question that in

 9   this case the plaintiffs allege, and must prove, third-party reliance as part of their chain of

10   causation. Plaintiffs allege an injury that is caused by physicians relying on Lilly’s

11   misrepresentations and prescribing Zyprexa accordingly. Because reliance is a necessary

12   part of the causation theory advanced by the plaintiffs, we must ask whether reliance can

13   be shown by generalized proof.

14          A. Excess Price Theory

15          The district court granted class certification on the theory that plaintiffs could use

16   generalized proof to show that Zyprexa was overpriced as a result of Lilly’s “excessive

17   claims of utility” and “disavowal of [the drug’s] adverse secondary effects.” Because we

18   conclude that plaintiffs’ excess price theory is not susceptible to generalized proof with

19   respect to either but-for or proximate causation, class certification based on this theory

20   was an abuse of discretion.

21                 1. But-for Causation



                                                   24
 1          Two years ago, we held that reliance on a misrepresentation made as part of a

 2   nationwide marketing strategy “cannot be the subject of general proof.” McLaughlin, 522

 3   F.3d at 223. In McLaughlin, the alleged misrepresentation arose from the marketing of

 4   light cigarettes as healthier than full-flavored cigarettes. We concluded that because each

 5   individual consumer might have purchased light cigarettes for any number of reasons

 6   other than the purported health claim, individualized proof was necessary to show the

 7   causal link between the misrepresentation that light cigarettes were healthier and the

 8   injury to the consumers who smoked light cigarettes and suffered the same ill health

 9   effects as if they had smoked regular cigarettes. Id.

10          McLaughlin also rejected the theory that the cigarette manufacturers “distorted the

11   body of public information” as a whole. Id. at 223-24. In advancing this theory, the

12   McLaughlin plaintiffs invoked the fraud-on-the-market presumption established in the

13   context of the securities market. Because misrepresentations by securities issuers affect

14   the price of those securities when they are traded on the open market, and because

15   investors view the market price of securities as an accurate measure of value, investor

16   reliance upon public misrepresentations by securities issuers is presumed. McLaughlin

17   refused to extend this presumption into the consumer market for cigarettes, explaining

18   that the market for consumer goods “is anything but efficient,” as demonstrated by the

19   fact that publication of monographs explaining that light cigarettes were no healthier than


                                                  25
 1   regular cigarettes “produced no change in either the sales or the price” of light cigarettes.

 2   Id. at 224.

 3          The district court believed that McLaughlin was distinguishable from the present

 4   case and that here “the evidence supports a finding of an overcharge based on the fraud

 5   on doctors, third-party payors, and others.” In re Zyprexa Prods. Liab. Litig., 253 F.R.D.

 6   69, 194 (E.D.N.Y. 2008). “The fraud was directed to prescribing doctors. The

 7   overpayments were made by third-party . . . payors.” Id. at 191.

 8          However, the evidence in the record, as discussed above, supports the conclusion

 9   that prescribing doctors do not generally consider the price of a medication when deciding

10   what to prescribe for an individual patient. Any reliance by doctors on misrepresentations

11   as to the efficacy and side effects of a drug, therefore, was not a but-for cause of the price

12   that TPPs ultimately paid for each prescription.

13                 2. Proximate Causation

14          Even assuming but-for causation, plaintiff’s theory of liability does not permit

15   proximate cause to be shown by generalized proof. The TPP plaintiffs, who unlike the

16   doctors were in a position to negotiate the prices of drugs in their formularies, paid the

17   full price set by Lilly. The TPP plaintiffs draw a chain of causation in which Lilly

18   distributes misinformation about Zyprexa, physicians rely upon that misinformation and

19   prescribe Zyprexa for their patients, and then the TPPs overpay. This narrative skips


                                                   26
 1   several steps and obscures the more attenuated link between the alleged

 2   misrepresentations made to doctors and the ultimate injury to the TPPs. In fact, if

 3   plaintiffs’ factual allegations are correct, the chain of causation runs as follows: Lilly

 4   distributes misinformation about Zyprexa, physicians rely upon the misinformation and

 5   prescribe Zyprexa, TPPs relying on the advice of PBMs and their Pharmacy and

 6   Therapeutics Committees place Zyprexa on their formularies as approved drugs, TPPs fail

 7   to negotiate the price of Zyprexa below the level set by Lilly, and TPPs overpay for

 8   Zyprexa. Thus, in this case “the conduct directly causing the harm was distinct from the

 9   conduct giving rise to the fraud.” Hemi Group, 130 S. Ct. at 990. Plaintiffs’ “theory of

10   liability rests on the independent actions of third and even fourth parties,” id. at 992, as

11   physicians, PBMs, and PBM Pharmacy and Therapeutics Committees all play a role in the

12   chain between Lilly and TPPs.

13          Crucially, the TPPs do not allege that they relied on Lilly’s misrepresentations –

14   the misrepresentations at issue were “directed through mailings and otherwise at doctors.”

15   In re Zyprexa, 253 F.R.D. at 193. Because only the TPPs were in a position to negotiate

16   the price paid for Zyprexa, however, the only reliance that might show proximate

17   causation with respect to price is reliance by the TPPs, not reliance by the doctors.

18          Furthermore, the failure of most TPPs to negotiate Zyprexa’s price demonstrates

19   why generalized proof cannot show proximate causation in this context. There is


                                                   27
 1   evidence that at various times, individual TPPs began to request rebates from Lilly or

 2   restrict usage of Zyprexa for some indications. Even after the side effects of Zyprexa

 3   became publicly known, however, most TPPs continued to pay the full price when

 4   Zyprexa was prescribed to treat symptoms of schizophrenia, even as payment for other

 5   indications were limited. Because these varying actions prompt questions about why

 6   certain TPPs negotiated Zyprexa’s price where others didn’t, and why approval of

 7   Zyprexa for some indications was limited by some TPPs, generalized proof of reliance by

 8   doctors cannot complete the causation chain.2 The district court’s certification of the

 9   plaintiff class was thus in error.

10          B. Quantity Effect Theory

11          Alternatively, plaintiffs seek to resurrect the quantity effect theory of injury.

12   Plaintiffs themselves appear to have abandoned this theory before the district court as a

13   basis for class certification, recognizing the unworkable complexity of joining as a single

14   class of plaintiffs some individuals who they argue should never have been prescribed

15   Zyprexa and some individuals who they argue were properly prescribed Zyprexa, but paid

16   too much for it. At a hearing before the district court, plaintiffs stated that they did “not


            2
              There is also a question whether individual TPPs offer different benefits or cover
     populations of patients with salient characteristics that could impact injury or damages or that
     might allow aggregate proof of an individual TPP’s patients and prescriptions. The district court
     did not analyze any such data, so we express no view as to whether such differences further
     undermine the ability of the TPPs to establish either injury or reliance by generalized proof.

                                                    28
 1   seek to get all of the money back for the people who otherwise would not have bought the

 2   product.” Accordingly, the district court certified a class of TPPs seeking only damages

 3   for overpayments, and not for excess prescriptions.

 4          Even if plaintiffs had not abandoned reliance on the quantity effect theory,

 5   however, that theory suffers from many of the same faults as the excess price theory. An

 6   examination of plaintiffs’ theory of causation makes this apparent. Dr. Harris, plaintiffs’

 7   expert, estimated damages under the quantity effect theory by assuming that the decline in

 8   the number of Zyprexa prescriptions following the label change and “Dear Doctor” letter

 9   in 2003 and 2004 was due almost entirely to a decrease in the number of off-label

10   Zyprexa prescriptions. Dr. Harris then assumed that, but for Lilly’s alleged

11   misrepresentations, sales of Zyprexa would never have risen above the number of sales in

12   2006, after more accurate information about Zyprexa’s side effects became public. Dr.

13   Harris thus postulated that every prescription above the number of prescriptions written in

14   2006 was an “excess” prescription, and plaintiffs should recover the full cost of every

15   excess prescription.

16          Having removed the variable of price, the chain of causation is in one sense

17   simpler: TPPs place Zyprexa on their formularies as approved drugs, Lilly distributes

18   misinformation about Zyprexa, physicians rely upon the misinformation and prescribe

19   Zyprexa, and TPPs pay for too many Zyprexa prescriptions.


                                                  29
 1          The nature of prescriptions, however, means that this theory of causation is

 2   interrupted by the independent actions of prescribing physicians, which thwarts any

 3   attempt to show proximate cause through generalized proof. Plaintiffs argue that “the

 4   ultimate source for the information on which doctors based their prescribing decisions

 5   was Lilly and its consistent, pervasive marketing plan.” Lilly was not, however, the only

 6   source of information on which doctors based prescribing decisions. An individual

 7   patient’s diagnosis, past and current medications being taken by the patient, the

 8   physician’s own experience with prescribing Zyprexa, and the physician’s knowledge

 9   regarding the side effects of Zyprexa are all considerations that would have been taken

10   into account in addition to the alleged misrepresentations distributed by Lilly.

11          Furthermore, additional variables interfere further with plaintiffs’ theory of

12   causation. As the district court noted, the evidence showed that at least some doctors

13   were not misled by Lilly’s alleged misrepresentations, and thus would not have written

14   “excess” prescriptions as identified by the plaintiffs. This makes general proof of but-for

15   causation impossible.

16          In addition, showing injury by general proof is precluded by uncertainty about

17   what the alternatives to an “excess” prescription would have been, and how they would

18   have been distributed amongst the plaintiffs. Dr. Harris limits his definition of excess

19   prescriptions to off-label prescriptions, and seems to imply that the alternative to an off-


                                                   30
 1   label prescription is no prescription at all. But, as plaintiffs argue, Lilly promoted

 2   Zyprexa as treatment for disorders such as anxiety, depression, and dementia. Plaintiffs

 3   have not presented any evidence to show that, had Zyprexa not been prescribed, no

 4   medication would have been prescribed, nor that possible alternatives, such as

 5   antidepressants, would have been less expensive than Zyprexa. Similarly, each TPP and

 6   its PBM had to approve Zyprexa’s placement on a formulary. Even now, TPPs pay for

 7   Zyprexa and for the most part have not implemented close control or review of Zyprexa

 8   prescriptions. Each TPP, moreover, covers a different group of insured patients. Given

 9   the patterns of off-label Zyprexa prescriptions, it seems likely that individual TPPs paid

10   for different numbers of off-label prescriptions. For example, plaintiffs presented

11   evidence that Lilly specifically targeted elderly patients suffering from dementia as

12   candidates for Zyprexa. The average age of the population served by an individual TPP,

13   therefore, would have strong bearing on the damages incurred.

14          All of these variables show that the quantity effect theory is no more demonstrable

15   with generalized proof than the excess price theory. Plaintiffs cannot use generalized

16   proof when individual physicians prescribing Zyprexa may have relied on Lilly’s alleged

17   misrepresentations to different degrees, or not at all, when some excess prescriptions may

18   not have actually caused loss, given the likelihood of substitute prescriptions for other

19   drugs, and when different TPPs may have paid for different “excess” quantities of


                                                   31
 1   prescriptions. See Hemi Group, 130 S. Ct. at 992; McLaughlin, 522 F.3d at 226. We

 2   therefore decline to affirm class certification based on the quantity effect theory.

 3   III. Summary Judgment

 4          Before the district court certified the class, it denied Lilly’s motion for summary

 5   judgment dismissing the complaint. In denying summary judgment, the district court

 6   cited Schwab v. Philip Morris USA, Inc., 449 F. Supp. 2d 992 (E.D.N.Y. 2006), which

 7   was overturned by McLaughlin, upon which much of our analysis above rests. The

 8   district court acknowledged, when certifying the denial of summary judgment along with

 9   the class certification for interlocutory appeal, that “[r]ecent appellate decisions may call

10   into question some aspects of the decision.” This is plainly true: Schwab was a class

11   action alleging that Philip Morris misrepresented light cigarettes as less harmful than

12   other cigarettes and thus charged an artificially inflated price for light cigarettes.

13   McLaughlin reversed, holding that reliance on the misrepresentation could not be shown

14   by general proof and decertifying the class. 522 F.3d at 222-24, 234.

15          The district court denied Lilly’s motion for summary judgment on the

16   understanding that “[b]oiled down, this is an overpricing claim.” After Hemi Group, it is

17   clear that plaintiffs’ overpricing theory is too attenuated to “meet RICO’s requirement of

18   a direct causal connection between the predicate offense and the alleged harm.” 130 S.

19   Ct. at 990 (internal quotation marks omitted). The quantity effect theory, however, is less


                                                    32
 1   attenuated, and while that theory cannot support class certification, it is not clear that the

 2   theory is not viable with respect to individual claims by some TPPs or other purchasers.

 3   Because the district court did not consider individual claims under the quantity effect

 4   theory when it ruled on Lilly’s motion for summary judgment, we decline to consider

 5   whether summary judgment with respect to the quantity effect theory is appropriate in the

 6   first instance. We therefore vacate the denial of summary judgment insofar as the district

 7   court failed to grant summary judgment on the pricing theory, and remand for further

 8   proceedings, including possible further consideration of summary judgment, with respect

 9   to plaintiffs’ quantity effect theory.

10                                            C ONCLUSION

11          For the foregoing reasons, we REVERSE the class certification order, we

12   VACATE the order denying Lilly’s motion for summary judgment with respect to

13   plaintiffs’ overpricing claims, and we REMAND for further proceedings not inconsistent

14   with this opinion.

15

16




                                                   33
