Antitrust Law Daily Wrap Up, TOP STORY—SDWVa: Federal Courts Did Not Have Class Action Fairness Act Jurisdiction over West Virginia AG’s Antitrust Action Against Wholesale Drug Distributors, (Mar 28, 2013)

By Tobias J. Gillett, J.D., LLM.

Subject matter jurisdiction under the Class Action Fairness Act (CAFA) was lacking over an action by the Attorney General of the State of West Virginia against various wholesale drug distributors asserting that they had committed various violations of West Virginia law in the course of contributing to an epidemic of prescription drug abuse in West Virginia, including restraining trade in violation of the West Virginia Antitrust Act, the federal district court in Charleston has ruled (State of West Virginia v. AmerisourceBergen Drug Corp., March 27, 2013, Copenhaver, J.). Since the state was the real party in interest, minimal diversity under CAFA was absent, and the Attorney General had not been fraudulently joined to the case.

On June 26, 2012 the Attorney General of the State of West Virginia filed suit against a variety of wholesale drug distributors, alleging that they had contributed to an epidemic of prescription drug abuse in West Virginia. The Attorney General asserted that the distributors had supplied drugs to pharmacies that then dispensed the drugs based on false prescriptions “from physicians who are prescribing controlled substances for illegitimate medical purposes.”

The Attorney General alleged that prescription drug abuse cost the state hundreds of millions of dollars annually, and had adverse effects on West Virginia families, communities, hospitals, schools, courts, social service agencies, jails, and prisons, among other things. The Attorney General’s complaint noted in particular the impact of prescription drug abuse on the state medical care and criminal justice systems.

The Attorney General asserted a variety of claims, including claims for violation of the West Virginia Uniform Controlled Substances Act, the West Virginia Consumer Credit and Protection Act, and the West Virginia Antitrust Act, as well as claims for public nuisance, unjust enrichment, medical monitoring, and negligence. The Attorney General alleged that the distributors had violated the Antitrust Act by using unfair and deceptive business practices to obtain a dominant share of the West Virginia controlled substances market, and by conspiring with “pill mill” physicians and pharmacies “in order to restrain and monopolize trade in West Virginia for the ‘pill mill’ market.”

The Attorney General sought an injunction requiring the distributors to notify the West Virginia Board of Pharmacy of suspicious orders for controlled substances, and a jury trial to assess damages sustained from the law violations, nuisances, negligence, and unjust enrichment, as well as triple damages under the Antitrust Act.

On July 26, 2012, the distributors removed the case to federal court. In the present motion, the Attorney General sought remand of the case, asserting that the state was the real party in interest, that minimal diversity was lacking, and that subject matter jurisdiction was unavailable under the Class Action Fairness Act (CAFA).

The court initially observed that the burden of establishing removal jurisdiction fell on the removing party, and that courts are “obliged to construe removal jurisdiction strictly,” with doubts resolved in favor of the state courts retaining jurisdiction. Under CAFA, a party seeking removal of a mass action or class action must demonstrate federal jurisdiction, which requires satisfying minimal diversity. Minimal diversity demands that “any one member of the class of plaintiffs must be a citizen of a state different from any defendant,” but a state is not counted as a citizen for diversity purposes.

Here, the outcome turned on whether the state was the real party in interest, according to the court. The distributors contended that the state was the real party in interest only on one claim the Attorney General was statutorily authorized to bring, and that West Virginia residents were the real parties in interest on the other claims. The court noted a split in authority between courts that followed the “claim-by-claim approach,” under which each claim is analyzed to determine whether someone other than the state benefits from the claim, and courts that followed the “whole-case approach,” under which the entire complaint is analyzed to determine the interest the state has in the lawsuit as a whole.

The court followed the whole-case approach, noting that the Fourth Circuit had decided a case following the distributors’ response brief adopting that method. In AU Optronics Corp. v. South Carolina, 2012-2 Trade Cases ¶78,100, 699 F.3d 385 (4th Cir. 2102), the Fourth Circuit concluded, in an action based on the South Carolina Antitrust Act and Unfair Trade Practices Act, that the state of South Carolina was “enforcing its own statutes in seeking to protect its citizens against price fixing conspiracies,” and that the fact that a South Carolina statute “permit[ted] a court to award restitution to injured citizens [was] incidental to the State’s overriding interests.”

The court concluded that the state of West Virginia in the present case also was the real party in interest. The Attorney General’s complaint was “positively permeated with the notion that the defendants’ monitoring and control failures have significantly contributed to the rampant abuse of prescription medications in the state.” It recited the harms caused to the state by that abuse, and sought a halt to the epidemic and compensation for past damages. To the extent the complaint sought compensation for individual damages, those damages “play[ed] a bit role at most in the litigation,” in the court’s view. Therefore, minimal diversity was lacking, and the case did not qualify as either a class action or a mass action under CAFA.

The court also rejected the distributors’ argument that the Attorney General had been fraudulently joined to the action in order to defeat diversity jurisdiction. Under the governing standard, a plaintiff would have to demonstrate either “that there is no possibility that the plaintiff would be able to establish a cause of action against the in-state defendant in state court; or that there has been outright fraud in the plaintiff’s pleading of jurisdictional facts.”

Although the distributors contended that the Attorney General was not authorized to pursue certain of the alleged claims, the court observed that they made no such contention regarding the Attorney General’s authority under the Antitrust Act. Whether or not the Attorney General’s allegations concerning that claim were “the antithesis of the restriction of trade,” as asserted by the distributors, they did still “offer the possibility of a right to relief.” This was enough to defeat the distributors’ fraudulent joinder claim, in the court’s view. Therefore, the court found “no basis for the exercise of subject matter jurisdiction under CAFA,” and remanded the case.

The case is Civil Action No. 2:12-3760.

Attorneys: Daniel W. Greear for the State of West Virginia. A. L. Emch (Jackson Kelly) for AmerisourceBergen Drug Corporation.

Companies: AmerisourceBergen Drug Corp.; Miami-Luken, Inc.; J.M Smith Corp.; The Harvard Drug Group, LLC; Anda Inc.; Associated Pharmacies, Inc.; Auburn Pharmaceutical Co.; H.D. Smith Wholesale Drug Co.; KeySource Medical Inc.; Masters Pharmaceuticals, Inc.; Quest Pharmaceuticals, Inc.; Richie Pharmacal Co., Inc.; Top Rx, Inc.

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