Supreme Court Stock Holdings And Preemption
24 CommentsBy Ed Silverman // May 13th, 2008 // 7:02 am
A funny thing happened on the way to the US Supreme Court this week - a few justices had to recuse themselves from a case because they held stock in companies with a matter before the court. Justice Samuel Alito, for instance, holds shares in Bristol-Myers Squibb.
This was the second recent instance in which a Supreme Court justice took this step. Two months ago, Chief Justice John Roberts sat out a case involving lawsuits against Pfizer because his May 2007 financial disclosure form indicated he held Pfizer stock between $10,000 and $50,000.
This raises a potentially interesting situation come fall. The court will review a preemption case involving Wyeth. At issue is the notion that FDA approval supercedes state law claims challenging safety, efficacy, or labeling. Drugmakers and the FDA argue preemption exists by maintaining agency actions are the final word on safety and effectiveness.
The court’s ruling will determine whether patients can sue a drugmaker through state law when a product has already been approved by the FDA. Given the high stakes, we wonder if Alito and Roberts will recuse themselves from the Wyeth case, even if they do not hold Wyeth stock. In other words, if a Supreme Court Justice has holdings in any drugmaker, should they not recuse themselves? What do you think?
Should Supreme Court Justices With Drug Stocks Recuse Themselves?
- Yes (72%, 86 Votes)
- No (28%, 33 Votes)
Total Voters: 119
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Dan
The Food and Drug Administration approves, for purposes of this article, pharmaceuticals and medical devices for use by American Citizens, theoretically, due to their flawless expertise and excellent judgment regarding the safety and quality of such items, as determined by this Department of Health and Human Services division. Considering the progressive acknowledgement of potentially deadly aspects of such approved meds and devices, more are getting removed from the market or are receiving very strict limitations on their use, which are called black box warnings, the FDA appears to not even exist for its original purpose.
The drug companies, for example, presumably in a rush to get their new med to market because of its patent life limitations, has for close to 20 years now paid the FDA to speed up the approval process with so much money that the pharma industry now provides nearly half of the FDA’s budget. This occurs due to the Prescription Drug Users Fee Act, which began in 1992. In my opinion, this creates a relationship between the two as client and provider. So clearly fallacies exist with the FDA’s approval process, as noted with the damage that has been done by the products it has approved to ideally benefit human health. Unfortunately, there is a standard, legal, and judicial doctrine called Pre-emption that protects the makers of damaging products from responsibility and exonerates them from any liability from the damage they may have caused to those who used their products.
Here’s why this happens: Pre-emption means that federal law is and will always be supreme over state law due to the U.S. constitution and its supremacy clause, yet the FDA lacks such a clause itself. So what does this term have to do with pharma companies avoid being charged by the victims for the liability from those harmed? The FDA is a Federal Administration. Since the FDA are flawless experts and a Federal Administration, the FDA and the makers of harmful products cannot be blamed for the damage they may have caused others, because the so called experts, the FDA, approved such products. And Federal Law along with the Supreme Court and the Bush Administration agree that the drug makers should not be liable. I smell cronyism with this arrangement.
The FDA has itself admitted it cannot do what it is required to do because of lack of resources, they say, which is to manage, supervise, and regulate with thorough and complete oversight the pharma and med. device companies. This in itself should raise the attention of the government to replenish this association because of their importance to the public. Since this is not the case, the FDA depends on the good faith of the saints of the pharma industry to disclose their product flaws once discovered and immediately. If this was done, then harmful drugs would likely cause less damage to others. Certainly, patients and doctors cannot be completely aware of such risks as the environment described exists presently, as they can be and are uninformed possibly of the knowledge and information of the drugs available.
However, patients do head to court for relief, rightfully so, for compensation from their suffering from such flawed products. A plus to this activity, regardless of its success, is that it becomes a catalyst for discovery and disclosure of the collusive ones, which are the pharma industry and the FDA, one could conclude.
On a more positive note, a recent pre-emption case involving Medtronic came to light which displeased the U.S. citizens thanks to certain media sources free of fear, apparently, so congress has pledged to pass a bill reversing this removal patient rights regarding such situations, which were both announced earlier this year, so the harmed ones can respond without the restrictions of their government, as they should. At the same time, however, GSK and Pfizer won their preemption cases regarding anti-depressant lawsuits just last month.
Our Health Care System is too important to accept wrongdoing and allow corruption regardless of the amount or severity. Awareness and action by U.S. citizens in time, I hope, will not allow such things to occur in the future again of a similar nature. Because presently, it appears apathy is our greatest weakness for such evil to exist.
“Justice shines by its own light.” — Cicero
condor
I think it extremely unfortunate that we are where we are on the Apartheid case — because a simle bit of advance planning could have prevented the recusal. Allow me to explain.
In the United States Supreme Court Justices receive “life-long” appointments — they cannot be removed, save for egregious misconduct. All Justices know this, as they take their seats on the highest court of the land — for life.
So, would it be too much to expect that, as a matter of professionalism, and comity, each confirmed nominee place all of his or her investments (or, at least, certainly — all public compnay stockholdings, here) in a blind trust, with an independent fiduciary to manage that trust?
I mean — the nominee is accepting a life-time appointment to the most important court in America — then recusals would no longer be any concern. Thus, all Justice Alito would know was that prior to his taking his seat on the court, he ONCE OWNED BMS — the trustee might have sold it before this last downturn, for all Alito knows. This is common among some ranks of judges — blind trusts.
Of course, the trust would be completely revocable, once the Justice decided to step down from the court.
We — as a nation, and the ABA, as a leader-group — ought to start pushing for this to be part of Senator Leahy’s confirmation hearings questioning: “Will you, if confirmed, agree to place all your public company equity securities holdings in a blind trust administered by an independent fiduciary?”
Problem sovled.
[PS: here's betting that Justices Scalia and Alito, and Chief Justice Roberts, will never agree to do so -- as it cuts against from their endless need to control. . . . everything.]
Nathan
This is absurd. Judges have investments just like all of us do. What about our 401k, 503b, and 529 plans? We all own significant stakes in nearly all industries. Aside from financial interests, what about personal interests? LOADS of conflicts there. Are you going to have judges recuse themselves from cases involving children because they have children at home? What about involving federal employees, because they themselves ARE federal employees?
We train judges and hire judges to be impartial. We need to trust them to do their job. Maybe it would be different if a judge has 30% of his/her net worth tied up in the drug industry. But I don’t think that is the case. John Roberts owned between $10k and $50k in Pfizer stock. Is that a lot? Sure. But what is his net worth? Probably a few $million. What does he make every year? Probably $200k-$300k. How does this Pfizer investment compare to his other investments?
I’ll repeat: We train judges and hire judges to be impartial. We should trust them to do their job.
Ed Silverman
Hi Nathan,
If stockholdings weren’t an issue in the first place, there would not have been any recusals recently. That’s why I posed the question. But thanks for the thought.
Cheers
ed
Al
Funny that Supreme Court justices have to disclose their pharmaceutical investments, but not physicians. Perhaps docs should be required to say to a patient, “Before I give you this prescription for Lipitor, I am required to tell you that I own 500 shares of Merck stock. Furthermore, my lunch today was provided by a Merck sales rep, and this pen I’m using, a rare collector’s item Vioxx pen, was given to me by the same rep.”
Or perhaps we should take Jim Hightower’s suggestion for elected officials and apply it to Docs — they should wear all their sponsors’ patches on their white coat, like NASCAR drivers.
condor
If memory serves — and, to amplify my point about using “blind trusts” — I think long-time US Supreme Court Justice Sandra Day O’Connor had placed all of her investments in a blind trust, for the entire duration of her 20-plus years on the court. That, it strikes me, is what we ought to expect of the highest court — that her justices not tolerate even the mere APPEARNCE of a $50,000 conflict of interest.
[I may put up a short piece on this notion, over at my blog, later today -- if I can find some reliable data on the Justice O'Connor point.]
As to real “personal connections”, Nathan — the Justices do recuse themselves (and applicable law requires them to) in many cases where the litigants are personally known to them, as friends.
Great topic, Ed!
condor
First — I was clearly mistaken in my memory about Justice Sandra Day O’Connor, viz:
“. . .The other mass recusals this fall were also unexplained, but are easier to figure out. In October, Roberts, Breyer, and O’Connor recused themselves in the denial of review for two patent infringement cases, Merck & Co. v. Teva Pharmaceuticals and Teva Pharmaceuticals v. Pfizer, Inc. Roberts and O’Connor both own stock in Merck and Pfizer, according to their latest financial disclosure forms, and Breyer owns Merck stock. And because the three all own Nokia stock, they also recused themselves in Cellco Partnership v. Pinney and Nokia v. Naquin, cases that concern the safety of cellular phones and thus affect the entire industry.
Most lawyers involved in those cases did not return calls or would only comment anonymously, for fear of offending the justices. One says it would be “an interesting issue” for a corporation and its stockholders if it became clear that whenever the company petitioned the Supreme Court, or was brought there by an adversary, it would face only a six-member panel. But that lawyer and others note that the problem may lessen when O’Connor retires. Throughout her tenure, O’Connor has recused herself more often than her colleagues, mainly because of her telecommunications stock holdings.
If Alito is confirmed to replace O’Connor, he will face far fewer stock-related recusals. Most of his assets are in a dozen different Vanguard funds — holdings that raised questions soon after he was nominated to the high court. . . .”
Source:
http://www.law.com/jsp/article.jsp?id=1132308314617
Note though that Justices Breyer, in addition to Roberts, at least in 2005, owned Pharma stock.
Ed — this may be worth tracking more closely.
I may do a longer post on this, now, over at mine — A Justice by Justice review — as to how conflicts would affect any decision on pre-emption. Hmmmm. We’ll see.
Nathan
Condor,
Here’s my point: It’s a sad state we’ve gotten ourselves into when we accept a “nondecision” like the Apartheid one yesterday. We either need to eliminate the conflicts or accept the conflicts. “Nondecisions” like this are not acceptable for the future of our country. We need people to step up and make decions on important cases like preemption. I’ll accept the consequences of preemption (up or down) as the rule of the land. However, a “non-decision” like that spoken about by Ed would completely piss me off and make me question the validity of our legal system.
condor
Nathan — Agreed. Mine is now up:
http://shearlingsplowed.blogspot.com/2008/05/with-fda-preemption-case-looming-on.html
I’ll ad to it, throughout the day.
Justice in Michigan
While I raised this question in a thread yesterday (on apartheid liability) I do not have definitive (to me) convictions about it.
Clearly, there is a line somewhere. Mainly, I was interested in relevant precedents and their rationale. Looks like Condor is supplying some of that.
I’d also remind us that the Court has already ruled on preemption in the device arena, upholding it in Riegel.
condor
Perhaps surprisingly — and to Justice in Michigan’s point, above — Justice Setven G. Breyer, it would seem, has the most at stake in these med/pharma cases — and he HAD a fair amount at stake in the device preemption case {via Quest Diagnostics} — did he recuse? I’ll go look it up [All such recusals should be listed in the headnotes to the case], and report back only if he did NOT recuse himself.
In any event, we’ll know more, later this week, when the 2007 Forms come online at Oyes.org.
Great conversation here!
condor
Wild — Breyer did not recuse himself in the Medtronic case:
“. . .Scalia, J., delivered the opinion of the Court, in which Roberts, C. J., and Kennedy, Souter, Thomas, Breyer, and Alito, JJ., joined, and in which Stevens, J., joined except for Parts III–A and III–B. Stevens, J., filed an opinion concurring in part and concurring in the judgment. Ginsburg, J., filed a dissenting opinion. . . .”
http://www.law.cornell.edu/supct/search/display.html?terms=Riegel&url=/supct/html/06-179.ZS.html
Nathan
Justice (or someone else),
Let’s say that the Supreme Court rules in favor of preemption this fall. Do you think that drug stock prices will shoot up? Conversely, if they reject preemption, will prices fall?
My gut feeling is that a negative outcome will not affect stock prices but a positive outcome might add 5 or 10% to stock prices. Why is this important? It’s important because Ed (and others) are alleging that $10,000 to $50,000 in stock is a big deal. Is it? If the price shoots up 10%, that’s a whooping $1000-$5000 that the justice gained. Does anyone really think that this paltry sum of money would influence the thinking of a justice?
I can’t imagine that companies spend more than 5 or 10% of their income on lawsuit payouts. That’s why I assume that they would only see a 5-10% bump in stock price if these lawsuits were eliminated… Any thoughts?
Marusa
With the FDA’s track record and Pharma’s nonclosure of information such as in the Enhance trial, preemption should not even be considered.
condor
Hey, Nathan –
I guess you and I will differ rather markedly on this point.
The imagined math (yours: 5% to 10%) seems to be lacking some real-world examples:
So, imagine, if you will, that Merck had NEVER faced liability for, say, a Vioxx fall-out. Add $4.2 billion in settlement proceeds back to 2008 NET-income; AND add back perhaps $700 million in “all-in” legal fees, expert witnesses, jury consultants, opinion studies, mediations, and post-event FDA submissions. . . . ALL of it falls directly to the NET INCOME line — deduct taxes, and it becomes whole dollars of NEW EPS!
Even for Merck, that would “move the needle”, and move it QUITE A BIT — that is one drug; one event; one year.
Consider the Prozac cases.
Consider (on implantable device side, now) mammary implant litigation — again, $4.1 billion global settlement funds — returned to Dow-Corning’s bottom line in 2008. And, perhaps, another billion in fees, etc. — or almost $5 billion — it would likely not have been placed in receivership.
THOSE are the stakes — and I submit to you, that (at least as to Justice Breyer’s holdings — see below) these sorts of increased profitablity — in perpetuity, now! — will make a BIG difference.
An onlder version of this would be the old blood-products-chield laws — which prevented suits against blood products producers. Look at how much that business has declined, since the appearance of Swiss-Cheese-like holes throughout that doctrine. . . . effectively dissolving the blood products “shields”.
Finally — and of lesser import, here, but worthy of note, nonetheless — Justice Breyer’s interests look to be well-north of $300,000, or 6 to 30 times the amounts you’ve originally suggested. See his actual 2006 Form on my site — PDF.
Justice in Michigan
Re: Condor’s point: “A recent pre-emption case involving Medtronic came to light which displeased the U.S. citizens thanks to certain media sources free of fear, apparently, so congress has pledged to pass a bill reversing this removal patient rights regarding such situations, which were both announced earlier this year, so the harmed ones can respond without the restrictions of their government, as they should.”
I know there was “talk” by some in Congress - particularly Kennedy, Pallone, and Waxman - about amending the MDA so that the impact of the Riegel v. Medtronic decision would be modulated. But my impression is that not much has happened. (Waxman’s hearing tomorrow is, of course, related.) Do you know if a bill has actually been introduced? And, if so, its number?
Re: Riegel, yes, Breyer did not recuse. Interesting example.
To Nathan’s question - Wow, no one has asked me about stock prices before, and my wife would suggest I’m not the one to go by! So the truth is I have no idea. Perhaps one could extrapolate from whatever happened with device company share price following Riegel (I have no idea of that either). My _guess_ is that whatever bump, if any, would be very small. There are too many other factors.
Also, it depends on how the cases are decided. There are scenarios in which Wyeth v. Levine could be decided fairly narrowly, and thus might not have the impact on the “big question” of preemption that most anticipate it will have.
Maybe this is a good question for Cramer? A big preemption Boo-ya.
Nathan
Condor,
Thanks — that’s a great point. The net gain in money is probably on the order of 5-10% annually, but I neglected to note that the money is essentially FREE — going directly to the bottom line rather than being filtered through administrative, marketing and research along the way.
Justice,
I wasn’t assuming that you are a financial guru — I just figured that you had thought about it because it does have some significant implications to this conflict-of-interest issue. If the stock price wouldn’t change much based on the ruling, then there really isn’t much of a conflict of interest regardless of how much stock any of the justices own.
Justice in Michigan
Hi Nathan - I know; I was having fun with the _fantasy_ of being a financial guru!
Again, there are a lot of variables. It would be good to know relevant precedents and decision-rules on recusal, which were my own questions.
But just for curiosity, I checked in to see what happened with Medtronic stock before and after the Riegel decision. The chart I got was rather crude, and I didn’t dig for all the exact dates, but it looks like there was a significant sell-off in September - _possibly_ coinciding with when Court decided to hear case (but I don’t recall that). Stock abruptly dropped ten points or so.
Since then, it’s been up and down, but not much overall variation. Thus, still roughly where it was after drop-off.
So, as I read tea leaves, it _looks_ to me (all disclaimers apply) that the potential cost of a negative Court decision made more difference (perhaps via institutional dumps) than the benefits of a positive one - at least so far.
Thus, if one were looking closely at Justice COIs, the relevant moment might be when cert. is granted (case will be heard) rather than when/how it is decided.
Note also that Riegel was brought by Riegel _against_ Medtronic. The other major preemption cases - Kent, Levine, etc. - have been brought by company in the attempt to reverese lower court decisions in favor of plaintiffs. That would make a difference too.
Maybe I should open up a sideline….Moolah in Michigan
condor
Two points if I might — the general federal rules of judicial conduct and recusal, do not, by their terms apply to the Supreme Court of the United States. Odd, huh? So there are essentially NO written rules that explicitly require Supreme COurt recusals, in any case. Why?
Well — the thought, I gather, was that these Justices ought know better than anyone that the whole world watches their rulings — and they, as “the best of the best”, would be self-limiting on conflicts of interest. And I think that has proved generally true. But there are no rules to cite, as to SCOTUS recusals.
Now, on the Medtronic stock charting — first, Medtronic stick has had many problems of its own (confusing variables), but more importantly, I think most people viewed that case as Act II in a Four Act Play. The smart money knew the fat lady hadn’t cleared her throat yet. So, one can’t read too much into that one stock-pricing.
If, on the other hand, the Justices sweep aside damages for all drugs — I think we will see a reall effect. Though note that Rep. Waxman is already busily drafting legislation to nullify the result in the Medtronic case.
For what it is worth. . . .
Chris
You have forgotten the effect of insurance. THese companies have insurance against product liability.
Bob Freeman
Chris, on another topic (CROs) on a different threat (one that I can’t find) you asked me and Ol Cranky about CROs and our reservations about them. I didn’t have time to answer at the time but offer the following anecdotal experiences:
CROs cultivate relationships with senior medical and clinical development people in a company and view them as the only client. That means if you want to raise concerns with them or explore data analyses unrelated to the direct purpose of the clinical trial, you tend to be blown off.
One has little control over what a CRO does on a daily basis. The flow of communications is not as consistent or as straighforward as either the contract requires. Getting info can be as difficult as pulling teeth.
Below the level of senior people in CROs you see a big drop off in quality and experience. That’s a rather damning statement to make but that’s my experience and its found across both CROs and consulting firms. In other words a lot of the people running the trials are inexperienced (to be kind) and think they know it all.
Some are better than others so I shouldn’t generalize my experiences to the entire sector.
Chris
Bob,
Thanks for your message. (I’m a different Chris to the one posting above btw). I think the key to handling a CRO like any other service business is that the client is king, and if you are not getting the service or tlc you deserve - or feel you deserve - there’s a simple way to let them know the business is not secure. I agree with your overall comment about seniority of people too.
Chris
CMC guy
Bob I think it may have been following thread where you (& M Helm?) suggested CRO issues.
http://www.pharmalot.com/2008/05/fda-scraps-helsinki-rule-on-human-subjects/#comments
I was not sure in that discussion whether CRO was “contract clinical sites” where study is done (treat patients) or more the “administrative coordination” contractors who run trials (supervise, monitor collect data) as I have seen CRO refer to both.
My second hand observations in working/meetings with Clinical groups (CRO type 2 mostly) would generally support your comments on highly variable (drop off) in experience, inconsistent communications and (sucking up) with potential lack of engagement (usually if might rock the boat). However CROs can be an effective/necessary tool, particularly for small companies, but like any contractor (i.e. manufacturing) good ones requires sponsors to provide due diligence up front, clear objectives and expectations, monitoring and adjustments. Unfortunately many sponsors do not exercise these responsibilities (often because they are likewise inexperienced themselves).
The other side of this I have seen is that many of the issues are as bad or worse at academic clinical sites (more like the type 1 CRO) whose agenda seems more geared toward (hesitate to say) getting grants/payments and papers and where GCP appears to be an after thought. Again whether managed via CRO, or directly, the sponsor has to be proactive with all clinical sites with problems. As you suggest should not generalize but if you are going to point at CROs there must be recognition that sponsors and academics suffer similar failings.
Bob Freeman
CMC Guy and Chris:
CMC: I’m in agreement with all your points. Frankly, I don’t see how we could function efficiently without them. And, I certainly agree with your point about academic centers. Any loss of key or support personnel during a study can derail deadlines. I’ve also run into quite a few super egos.
I’m not overly negative on CROs, quite the contrary, but I have had my moments.
Chris, sorry I got the different Chris.