Painters and Allied Trades District Council 82 Health Care Fund v. Takeda Pharmaceuticals Company Ltd.

          Argued and Submitted June 6, 2019 Seattle, Washington

          Appeal from the United States District Court for the Central District of California D.C. No. 2:17-cv-07223-SVW-AS Stephen V. Wilson, District Judge, Presiding

          R. Brent Wisner (argued) and Michael L. Baum, Baum Hedlund Aristei & Goldman PC, Los Angeles, California; Christopher L. Coffin and Nicholas R. Rockforte, Pendley Baudin & Coffin LLP, New Orleans, Louisiana; for Plaintiffs-Appellants.

          Jonathan S. Franklin (argued), Norton Rose Fulbright U.S. LLP, Washington, D.C.; Darryl W. Anderson and Geraldine W. Young, Norton Rose Fulbright LLP, Houston, Texas; for Defendants-Appellees Takeda Pharmaceuticals Company Limited and Takeda Pharmaceuticals U.S.A.

          Randall L. Christian (argued) and Susan E. Burnett, Bowman and Brooke LLP, Austin, Texas, for Defendant-Appellee Eli Lilly and Co.

          Before: Carlos T. Bea, Jacqueline H. Nguyen, and Paul J. Watford ^[*] , Circuit Judges.

         SUMMARY^[**]

         Racketeer Influenced and Corrupt Organizations Act

         The panel reversed the district court's judgment dismissing civil RICO claims under Fed.R.Civ.P. 12(b)(6) for lack of RICO standing and remanded for further proceedings.

         Plaintiffs brought a putative class action against pharmaceutical companies, alleging that the companies refused to change the warning label of their drug Actos or otherwise inform the public after they learned that the drug increased a patient's risk of developing bladder cancer. Plaintiffs were five patients and a third-party payor ("TPP") of health and welfare benefits to covered members and their families. Plaintiffs sought to represent a class of similarly situated patients and TPPs who paid or incurred costs for Actos. They alleged that defendants conspired to commit mail and wire fraud by intentionally misleading physicians, consumers, and TPPs to believe that Actos did not increase a person's risk of developing bladder cancer. Plaintiffs sought to recover economic damages under RICO for the payments they made to purchase Actos, which they allege they would not have purchased had they known of the bladder cancer risk. The district court held that plaintiffs failed to allege that their harm was "by reason of" the alleged RICO violation, as required for RICO standing, because they failed to allege the claimed RICO violation was the proximate cause of their claimed losses.

         Agreeing with the First and Third Circuits, and disagreeing with the Second and Seventh Circuits, the panel held that plaintiffs sufficiently alleged proximate cause. Supreme Court precedent requires a direct relationship between the injury asserted and the defendant's conduct. The Supreme Court applies the Holmes factors, considering (1) whether it would be too difficult to ascertain what damages are attributable to defendants' alleged RICO violation, (2) the risk of multiple recoveries by plaintiffs at different levels of injury from defendants' acts, and (3) whether holding defendants liable justifies the general interest of deterring injurious conduct. The panel concluded that plaintiffs sufficiently alleged a direct relationship, and the Holmes factors weighed in favor of permitting their RICO claims to proceed. The panel thus held that patients and TPPs suing pharmaceutical companies for concealing an allegedly unknown safety risk about a drug can satisfy RICO's proximate cause requirement. The panel concluded that, although prescribing physicians served as intermediaries between defendants' fraudulent omission of Actos's risk of causing bladder cancer and plaintiffs' payments for Actos, prescribing physicians did not constitute an intervening cause to cut off the chain of proximate causation. In addition, plaintiffs adequately alleged reliance on defendants' alleged misrepresentations and omissions.

         The panel addressed additional claims in a concurrently filed memorandum disposition.

          OPINION

          BEA, CIRCUIT JUDGE

         Today we confront an issue of first impression in our circuit, and one that has caused an apparent circuit split among four of our sister circuits: In civil actions brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO") against pharmaceutical companies, do patients and health insurance companies who reimbursed patients adequately allege the required element of proximate cause where they allege that, but for the defendant's omitted mention of a drug's known safety risk, they would not have paid for the drug?

         I. FACTUAL BACKGROUND

         This appeal arises from a putative class action against Takeda Pharmaceuticals USA, Inc., its parent company Takeda Pharmaceutical Company Ltd., and Eli Lilly & Co. (collectively, "Defendants"). Together, Defendants developed and marketed a drug named Actos. Actos was intended to lower blood sugar in type 2 diabetics. Defendants obtained Food and Drug Administration ("FDA") approval for Actos in 1999. The plaintiffs allege that despite learning through multiple studies over the next several years that Actos increased a patient's risk of developing bladder cancer, Defendants refused to change Actos's warning label or otherwise inform the public of such risk. Further, the plaintiffs allege that Defendants convinced the FDA that studies revealing that Actos increased the risk of bladder cancer were wrong. Defendants are alleged to have actively misled prescribing physicians, consumers, and third-party payors into believing that Actos did not increase a person's risk of developing bladder cancer. Defendants did all of this, the plaintiffs allege, simply to increase their profits from the sale of Actos.

         On September 17, 2010, after further studies of Actos revealed an increased risk of bladder cancer, the FDA announced that it was conducting a safety review of Actos. On June 15, 2011, the FDA released an official warning to the public that Actos may be linked to bladder cancer in patients who use it over prolonged periods of time. Following the FDA's official warning, Defendants changed Actos's warning label to warn of a bladder cancer risk. The sales of Actos are alleged to have dropped shortly after the FDA issued its alert in 2010, and then again when the FDA issued its official warning in 2011, by a total of approximately 80%.

         A group of patients who developed bladder cancer after ingesting Actos and their family members then brought personal injury and wrongful death claims against Defendants in the Western District of Louisiana. After a 37-day trial in 2014, the jury returned a verdict in favor of the plaintiffs, but the parties later agreed to a global settlement program for all eligible personal injury claimants who used Actos before December 1, 2011 and had been diagnosed with bladder cancer. In re Actos (Pioglitazone) Prods. Liab. Litig., MDL No. 6:11-MD-2299, 274 F.Supp.3d 485, 503 (W.D. La. 2017).^[1]

         The present action was also originally filed in the Western District of Louisiana. But in late 2017, the parties stipulated to transfer the case to the Central District of California. The plaintiffs in this case comprise five individual patients from different states (collectively, "Patients") and Painters and Allied Trades District Council 82 Health Care Fund ("Painters Fund") (together, "Plaintiffs").

         Painters Fund is a third-party payor ("TPP") of health and welfare benefits to covered members and their families. As a TPP, Painters Fund reimburses its members' claims for drugs, including Actos, submitted by pharmacies and healthcare providers covered by its plan. Painters Fund "relies on each member to submit claims for prescription medications that are medically reasonable and necessary for treatment," with the expectation that patients and their prescribing physicians will "make informed decisions about which drugs will be prescribed and, in turn, submitted to [Painters Fund] for reimbursement." Painters Fund "has the authority to determine which drugs are covered under its plan, although, [it] entrusts the administration of claims and formulary determinations to Prime Therapeutics, LLC, based in Eagan, Minnesota."^[2]

         Patients are individuals with type 2 diabetes who were prescribed Actos by their physicians and who took Actos to help lower their blood sugar. Each patient paid an out-of-pocket sum for Actos. Patients each allege that neither they nor their physicians knew about Actos's risk of bladder cancer when they began taking the drug and that they immediately stopped taking Actos once they learned that it increased their risk of developing bladder cancer. Patients also allege that they never would have purchased Actos had they known that it increased their risk of developing bladder cancer, and thus, that they never would have submitted claims for reimbursement for purchases of Actos to their respective TPPs. Only one patient, Annie Snyder from California, alleges that prior to starting her prescription, she read and relied upon the Actos label. But Plaintiffs generally allege that Patients relied on Defendants' misrepresentations about Actos, by act or omission, in purchasing the drug, that physicians relied on such misrepresentations in prescribing Actos for their patients, and that TPPs relied on such misrepresentations in agreeing to pay for Actos prescriptions for their members.

         Plaintiffs seek to represent a class of similarly situated patients and TPPs "who paid or incurred costs for the drug Actos, for purposes other than resale, between 1999, i.e., when the drug was approved, and the present," excluding "those consumers who are presently seeking a personal injury claim arising out of their use of Actos." Plaintiffs argue that Defendants conspired to commit mail and wire fraud under 18 U.S.C. §§ 1341, 1343 by intentionally misleading physicians, consumers, and TPPs to believe that Actos did not increase a person's risk of developing bladder cancer. Plaintiffs seek to recover economic damages under RICO for the payments they made to purchase Actos under the assumption that it was a safe drug, which they allege they would not have purchased had they known that Actos increases a person's risk of developing bladder cancer (this is called the "quantity effect theory" of damages).^[3] Plaintiffs do not, however, seek to recover economic or non-economic damages caused by any person's actual ingestion of Actos.

         The district court dismissed with prejudice Plaintiffs' RICO claims under Federal Rule of Civil Procedure 12(b)(6) in a single paragraph, holding that Plaintiffs failed adequately to allege facts sufficient to establish that Defendants' acts and omissions were the proximate cause of their claimed damages. This appeal followed.^[4]

         II. ANALYSIS

         A. Standard of Review

         We review de novo the district court's grant of a Rule 12(b)(6) motion to dismiss. Bain v. Cal. Teachers Ass'n, 891 F.3d 1206, 1211 (9th Cir. 2018). We take all of Plaintiffs' factual allegations as true, and we may affirm the dismissal "only if it appears beyond doubt that [Plaintiffs] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief." Id. (internal quotation marks omitted).

         B. Plaintiffs' RICO Claims

         The crux of Plaintiffs' complaint rests on their civil RICO claims. Although the RICO statute was originally enacted to combat organized crime, "it has become a tool for everyday fraud cases brought against respected and legitimate enterprises." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 499 (1985) (internal quotation marks omitted). Broadly speaking, there are two parts to a civil RICO claim. The civil RICO violation is defined under 18 U.S.C. § 1962, ^[5] while "RICO standing" is defined under 18 U.S.C. § 1964(c). The district court dismissed Plaintiffs' RICO claims only for lack of standing, and thus we address only that portion of Plaintiffs' RICO claims.

         To allege civil RICO standing under 18 U.S.C. § 1964(c), a "plaintiff must show: (1) that his alleged harm qualifies as injury to his business or property; and (2) that his harm was 'by reason of' the RICO violation." Canyon County v. Syngenta Seeds, Inc., 519 F.3d 969, 972 (9th Cir. 2008). Defendants do not dispute that Plaintiffs have alleged an injury to their business or property. Rather, as the district court held, Defendants argue that Plaintiffs have failed to allege that their harm was "by reason of" the ...