APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Richard G. Stearns, U.S. District Judge]
The opinion of the court was delivered by: Lynch, Chief Judge.
Before Lynch, Chief Judge, Souter, Associate Justice,*fn1 and Lipez, Circuit Judge.
Appellants, a small dissident group ("the Samsell plaintiffs"), are within a larger class of medical patient consumers in a case alleging fraud in overcharging for the medication Lupron. These plaintiffs, along with insurers and private health care providers, have achieved a major settlement agreement which was approved by the district court. The total amount of the settlement was $150 million, of which $40 million was allocated to consumers. That agreement provided that if there were unclaimed monies from the $40 million consumer settlement pool even after full recovery to consumer plaintiffs, all unclaimed funds would go into a cy pres fund to be distributed at the discretion of the trial judge.
The Samsell plaintiffs appeal from the district court's distribution of the $11.4 million cy pres fund to the Dana Farber/Harvard Cancer Center and the Prostate Cancer Foundation ("DF/HCC") for work on the treatment of the diseases for which Lupron is prescribed. The Samsell plaintiffs make a series of subordinate attacks, all designed to increase the sums paid to them, though they have already recovered more than 100% of their actual damages. The award is defended by the plaintiff class and, naturally, by the recipient DF/HCC. The defendant manufacturer of Lupron, having settled the case, has not filed a brief with us.
We address for the first time the procedural and substantive standards for distribution of cy pres funds; in doing so, we express our unease with federal judges being put in the role of distributing cy pres funds at their discretion.
Finding no error, we affirm.
In 2001, the Department of Justice initiated criminal proceedings against TAP Pharmaceutical Products, Inc., ("TAP")*fn2 for violation of the Prescription Drug Marketing Act of 1987, Pub. L. No. 100-293, 102 Stat. 95. TAP admitted that from 1991 to 2001 it had encouraged doctors to improperly bill Medicare for free samples of its cancer drug Lupron so that they would continue to prescribe Lupron instead of less expensive, similarly effective drugs. Lupron is prescribed for prostate cancer in men, endometriosis and infertility in women, central precocious puberty in children, and preoperative treatment of patients with anemia caused by uterine fibroids. TAP encouraged physicians to bill Medicare for Lupron at an inflated Average Wholesale Price ("AWP") that TAP provided to an industry publication used by Medicare and insurance plans to establish reimbursement schedules for prescription drugs including Lupron. TAP pled guilty and paid a criminal fine of $290 million as well as civil restitution of nearly $600 million to Medicare and Medicaid and $25.5 million to the fifty states and the District of Columbia.
On the heels of TAP's guilty plea, three groups --individual consumer purchasers of Lupron, private health care plans, and insurers -- brought nine putative class action lawsuits against TAP to recover overpayment incurred as a result of TAP's practices. See In re: Lupron Mktg. & Sales Practices Litig., 245 F. Supp. 2d 280, 285 (D. Mass. 2003). Private insurers and health care plans had used the inflated AWP, as had Medicare and Medicaid, to determine their reimbursement payments to doctors for Lupron. The inflated AWP also resulted in higher out-of-pocket payments for patients on any portions of Lupron payments that were not covered by their insurance.
The Multi-District Litigation Panel consolidated all nine actions in the District of Massachusetts for pretrial proceedings. Id. The consolidated class action was brought under the civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, as well as under state consumer protection statutes and theories of common-law fraud and unjust enrichment.
The district court dismissed the conspiracy claims involving physicians under RICO because the complaint neither named a single doctor as a defendant nor alleged that the doctors who benefitted from the discounted purchases or free samples of Lupron were even aware of one another's existence as participants in a purported scheme to defraud. That dismissal is important for reasons stated later. The district court allowed the remaining conspiracy claims under RICO to proceed.
On October 11, 2004, the MDL parties informed the district court that they had reached a settlement as to all groups of plaintiffs and moved for preliminary approval of the negotiated agreement. On November 4, 2004, appellant Valerie Samsell, a consumer, filed a motion to intervene. The district court allowed Samsell to intervene "for the purpose of participating in the process established by the court for the evaluation of the proposed settlement." In re: Lupron Mktg. & Sales Practices Litig., No. 01-CV-10861 (D. Mass. Nov. 17, 2004). On November 24, 2004, the district court issued an order preliminarily approving the proposed settlement and settlement class. In re: Lupron Mktg. & Sales Practices Litig., 345 F. Supp. 2d 135, 138-39 (D. Mass. 2004).
In April 2005, the district court held a three-day fairness hearing on the proposed settlement. See In re Lupron Mktg. & Sales Practices Litig., 228 F.R.D. 75, 78 (D. Mass. 2005). Samsell called witnesses to testify, submitted seven depositions of additional witnesses, and presented twenty-three exhibits. Id. at 83-84. In addition, Samsell filed several objections to the settlement, including an objection that the amount of the settlement allocated to the class of consumer purchasers of Lupron was inadequate. On May 12, 2005, having found that the settlement was fair, reasonable and adequate, the district court issued a memorandum and order approving the settlement and certifying the class. Id. at 78, 98.
The approved settlement agreement allocated $40 million of the $150 million total settlement to consumer purchasers of Lupron. Id. at 86. It allowed these consumers to recover 30% of their total out-of-pocket payments for Lupron, or $100, whichever sum was greater. Id. at 87. Although the district court could not determine the size of the consumer class with certainty, given the high mortality rate associated with prostate cancer and the extended class period of more than twenty years, the district court found that the class likely included tens if not hundreds of thousands of consumer purchasers of Lupron or their estates. Id. at 88.
The district court's decision to approve the settlement agreement rested in part on an analysis of the likely damages suffered by the class plaintiffs, as presented by expert witnesses. Plaintiffs' two experts, Dr. Hartman and Dr. Rosenthal, testified that the allocation of the settlement funds was deliberately weighted to favor the consumer members of the class. Id. at 87 & n.26. Consumers were allocated approximately 27% of the total settlement, even though the consumer claims most likely accounted for 9% to 13% of the total overcharges. Id. at 87 n.26. The experts also testified that approximately 30% of the consumers' out-of-pocket expenses for Lupron represented a reasonable estimate of the actual overcharge that consumers suffered as a result of the inflated AWP. Id. at 87 & n.26. The settlement agreement was designed to pay consumers 100% of this estimated overcharge.
Significantly, the settlement agreement expressly anticipated the possibility of either a shortage or a surplus in the portion of the settlement funds allocated to consumers. In the case of a shortage, the settlement agreement provided that payments to consumers would be reduced on a pro rata basis. In the case of a surplus, the agreement provided:
All unclaimed funds remaining in the Net Consumer Settlement Pool shall be distributed in the discretion of the Settlement Court as it deems appropriate. If all or part of any unclaimed funds is distributed to one or more charitable organizations, TAP reserves whatever right it may have to claim any appropriate tax deductions for any such charitable donation(s), and no member of the Consumer Class or the TPP [Third Party Payers] Class or the SHP [Settling Health Plans] Group shall have a claim to any such deductions.
Following the district court's approval of the settlement agreement, the Samsell plaintiffs said they would pursue appeals of the settlement agreement unless they received more. As a result, all of the parties, including the Samsell plaintiffs, negotiated and executed an "implementation agreement." The implementation agreement provided an increase in the payments to the consumer class from 30% to 50% of their out-of-pocket expenses for Lupron. This meant that consumers would receive 167% of the damages the district court had found they had suffered. In return, the Samsell plaintiffs and other objectors agreed to withdraw their pending appeals and other objections to the settlement, to rescind their opt-out requests, to participate in the claims process, and to waive their right to appeal from the final judgment approving the settlement. The implementation agreement also awarded incentive payments to certain objectors, including Samsell, and permitted her attorneys to seek an award of their fees. On August 26, 2005, the district court entered its final order approving the settlement agreement as modified by the implementation agreement. In re: Lupron Mktg. & Sales Practices Litig., No. 01-CV-10861 (D. Mass. Aug. 26, 2005).
The parties initiated a national notice campaign designed to expose 80% of the members of the consumer class on three or more occasions to notice of the proposed settlement and the procedure for submitting claims. Notice was published in 947 newspapers, as well as through public service announcements, Lupron-related websites, and media coverage of the settlement. An interactive claims information website and a toll-free telephone number to take questions from class members were established. Consumer Notice Packets were mailed to the attorneys general of the fifty states, Puerto Rico, and the Virgin Islands. Direct mail was not used because of privacy and practicality concerns.
Consumers were allowed more than four years to file their claims. Despite these efforts, only about 11,000 individuals -- a fraction of the estimated tens or hundreds of thousands of members of the consumer class -- filed claims, given the high mortality rate among members of the class. At the conclusion of the claims administration process, approximately $11.4 million remained unclaimed.
The plaintiffs requested that the district court determine a plan for distribution of the $11.4 million in unclaimed funds. On January 13, 2009, during a hearing regarding the proposed disposition of the unclaimed funds, the district court stated its intention to "ensure that any distribution, whatever is done, is done both with the highest benefit of the class, present and absent in mind; that the money is distributed and spent responsibly; and, that it serves the highest purpose that was intended by the litigation and the ultimate settlement." After hearing the plaintiffs' alternative proposals, the district court narrowed its choice to three options: (1) awarding the unclaimed funds as additional compensation to the members of the consumer class who had already made claims and been paid in full under the settlement agreement; (2) conducting a supplemental claims process with a goal of identifying absent class members; and (3) making a cy pres award of the unclaimed funds for research addressing the medical conditions treated by Lupron for the benefit of the present and future patients suffering from these afflictions.
In response to a proposal to distribute some of the residual funds to a program created by a group of four doctors affiliated with Brigham and Women's Hospital ("the Loughlin Group"), the district judge disclosed that for nearly twelve years he had served as an uncompensated trustee on the board of Vincent Memorial Hospital, which is affiliated with the Massachusetts General Hospital. The judge said he was considering whether this posed any issues. The Samsell plaintiffs, who were present at the hearing, did not, either then or later, raise any objection regarding the judge's position on the board at Vincent or his continued involvement in the proceedings.
On May 19, 2009, the district court issued a memorandum and order stating its intention to make a cy pres award and distribute the residual funds for the purpose of funding research into the causes and treatments of Lupron-related conditions. In re: Lupron Mktg. & Sales Practices Litig., No. 01-CV-10861, 2009 WL 1395411 (D. Mass. May 19, 2009). The district court stated that it was inclined to distribute the funds to the Loughlin Group and invited the Loughlin Group to submit a formal proposal for the court's review. Id. at *2. The Samsell plaintiffs appealed this order to this court; we concluded that we lacked jurisdiction to review a non-final order and dismissed the appeal. See Samsell v. TAP Pharm. Prods., No. 09-1887 (1st Cir. Jan. 7, 2010).
Having learned about the residual funds from the May 19, 2009 order, a different group, DF/HCC, petitioned the district court to consider its proposal with respect to the unclaimed funds. The district court granted the request. On May 25, 2010, the district court invited the public to comment on the proposals advanced both by the Loughlin Group and by DF/HCC.
On August 6, 2010, the court issued a memorandum and order stating that it had decided to make a cy pres award of all of the unclaimed settlement funds to DF/HCC, to be made in three installments. In re: Lupron Mktg. & Sales Practices Litig., 729 F. Supp. 2d 492 (D. Mass. 2010). The court explained that it had rejected the option of a supplemental claims process because it would be "exorbitantly expensive (estimated at upwards of $1.74 million), time-consuming, and would likely recruit few new claimants given the high mortality rate among members of the class." Id. at 494 n.4. No attack is made on that finding in this appeal. The court further explained that its decision to award the funds to DF/HCC was influenced by four principal considerations. First, DF/HCC is an established organization "with experience in managing grant programs." Id. at 497. Second, its proposal "leverage[d] existing institutional infrastructure, funding mechanisms, and . . . relationships," which would reduce start-up and administrative costs. Id. Third, the proposal was designed to have "a broad national outreach to attract large-scale research collaborations, innovative pilot projects, promising young investigators, and talented graduate students." Id. Finally, DF/HCC "propose[d] to dedicate an appropriate portion of the funds to research involving cures for . . . Lupron-treated diseases and conditions" other than prostate cancer. Id.
The district court also crafted an oversight plan which required DF/HCC to submit regular reports to account for the grant awards and expenditures. Id. at 497-98. The award would be paid to DF/HCC in three installments as explicitly authorized by the district court. Id. at 498. The first installment was ordered disbursed to DF/HCC on ...