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In Re: Mcneil Consumer Healthcare

July 13, 2012

IN RE: MCNEIL CONSUMER HEALTHCARE, ET AL., MARKETING AND SALES PRACTICES LITIGATION


The opinion of the court was delivered by: McLaughlin, J.

Applies to: ALL ACTIONS

MEMORANDUM

This multidistrict litigation arises out of quality control problems at the defendants' facility manufacturing over-the-counter healthcare products in Fort Washington, Pennsylvania, which led to a series of recalls of those products. The named plaintiffs assert claims for economic loss on behalf of a putative nationwide class against Johnson & Johnson ("J&J"), McNeil Consumer Healthcare ("McNeil"), and four of their executives. The plaintiffs allege that they overpaid for the defendants' products as a result of the recalls and the defendants' scheme to conceal or downplay the scope of the quality control problems.

The defendants, who have offered a coupon or cash refund to consumers who purchased recalled drugs, have moved to dismiss the operative complaint, and assert that the named plaintiffs lack constitutional standing and have not met the applicable pleading standard. The Court will grant the defendants' motion because the plaintiffs have not pled facts that show a cognizable injury in fact, which is required to confer Article III standing.

I. Procedural Background

This litigation resulted from the consolidation of ten

individual actions filed around the country. Haviland v. McNeil Consumer Healthcare, No. 10-2195, was filed in this Court on May 12, 2010, asserting economic injuries arising out of the April 30, 2010 recall of over-the-counter children's drugs by McNeil, a part of the J&J "Family of Companies." Eight additional cases, also arising out of the April 2010 recall, were filed in district courts around the country.*fn1 All cases asserted claims for economic injury only, with the exception of Rivera v. Johnson & Johnson, which initially also asserted claims for physical injury. On October 8, 2010, the Judicial Panel on Multidistrict Litigation transferred the above-referenced cases to this Court, where they and all future "tag-alongs" were consolidated into MDL Number 2190.

The plaintiffs filed their initial consolidated class action complaint ("CAC") on January 12, 2011, adding allegations relating to behavior prior to the April 30, 2010 recall, expanding the number of named plaintiffs, and dropping all claims for physical injury. The CAC had named the above defendants as well as a number of contractor companies involved in a recall of Motrin IB,*fn2 and numerous other J&J and McNeil executives and board members. The defendants moved to dismiss for lack of standing and other pleading deficiencies in April 2011, and after oral argument in June 2011, the Court granted the motions to dismiss. Docket No. 47 ("Mem. Op."), available at In re McNeil Consumer Healthcare Mktg. & Sales Practices Litig., MDL No. 2190, 2011 WL 2802854 (E.D. Pa. July 15, 2011). In that opinion, the Court concluded that the named plaintiffs lacked standing as to all claims because they had not suffered an injury in fact, and because they had not established that the actions of the contractor defendants caused any economic injury. Mem. Op. 25 ("Even assuming that the 'serious problems' identified above encompass the allegations of specific product recalls and FDA citations, the plaintiffs fail to allege any personal harm arising therefrom."). The contractor defendants were dismissed with prejudice, but all claims against J&J, McNeil, and their employees were dismissed without prejudice.

The plaintiffs were given leave to file an amended complaint within thirty days, and the instant Second Amended Civil Consumer Class Action Complaint ("SAC") was filed on August 15, 2011. The defendants moved to strike certain matter from the complaint and moved separately to dismiss the complaint for lack of standing and for failure to state a claim. The Court held oral argument on the defendants' motions on January 19, 2012.

II. Facts as Alleged in the SAC

The SAC alleges that J&J and McNeil, along with four of its current and former executives,*fn3 conspired to conceal quality control problems beginning in at least December 2008 and affecting the quality of medications sold over-the-counter and manufactured, among other places, at McNeil's facility in Fort Washington. The twenty-four named plaintiffs*fn4 argue that the existence and concealment of these quality control problems led them to pay inflated prices because of J&J's reputation for safe and effective medications.

The defendants were aware of the quality control issues at McNeil but ignored them and concealed their nature from consumers despite their "red flags." Only in April 2010 did the defendants reveal that the FDA had cited McNeil for manufacturing problems after an inspection of the Fort Washington facility revealed deficiencies, despite the defendants' awareness of the "serious degradation of the quality and condition" of all the products manufactured there. SAC ¶¶ 4-10.

The main additions to the SAC are descriptions of the specific products that the named plaintiffs purchased, with National Drug Code ("NDC") designations where the plaintiffs have that information. When that information is not available or is incomplete, the SAC avers that the named plaintiff "is not able to provide a complete listing of the products [s]he purchased, or the complete identification of them (including the NDCs, lot numbers, and expiration dates) due to the passage of time and having discarded the Subject Products because of the recall." SAC ¶¶ 26, 29-34, 36, 39, 41-42, 45.

A. Quality Control Concerns and Recalls The named plaintiffs are individuals from fourteen states and Ontario, Canada who bring claims on behalf of themselves and a putative nationwide class of consumers who purchased the "Subject Products" between at least December 2008 and the present.*fn5 They allege that management-level employees of J&J and McNeil were aware of serious manufacturing and quality control problems at McNeil plants through, at a minimum, the FDA's April 30, 2010 report and the filing of shareholder derivative lawsuits against J&J. In response to those lawsuits a "Special Committee" of the J&J board investigated these issues and made a report on June 27, 2011, detailing the existence of these problems and the awareness of management-level officials of these issues. SAC ¶¶ 6, 8, 9.

The FDA report forced the defendants to admit publicly the "observations" made at the Fort Washington plant by investigators between April 19th and 30th of 2010 of failures to meet current good manufacturing practices ("cGMP"). The cGMP issues that the FDA identified included production control failures resulting in inconsistent drug strength, quality, and purity; inclusion of known contaminants; inadequate cleanliness and record keeping; failure to follow written process control procedures; inadequate training; and failure to issue regular reports on quality. Id. ¶¶ 312-13; Apr. 30, 2010 FDA Report, Id. Ex. G.

The day the FDA report was released, the Fort Washington facility was closed and McNeil announced a recall due to quality control issues but "not . . . on the basis of adverse medical events." The recall applied to forty types of products manufactured there including certain lots of liquid infant and children's products, such as Tylenol, Motrin, and Benadryl, due to particulate contamination and superpotency concerns. Congress conducted a series of hearings in May and September 2010 in response to the recall announcement. SAC ¶ 232 & Ex. I; Id. ¶¶ 256-57, 320-33.

The SAC also reviews a series of other recalls conducted by McNeil between 2008 and 2011 in response to quality concerns at McNeil's plants in Fort Washington and elsewhere.

The defendants recalled some lots of Motrin, Tylenol, Benadryl, Rolaids, Simply Sleep, St. Joseph Aspirin, Pepcid, Mylanta, AlternaGel, Sudafed, Sinutab, Topamax, Risperdal, and Risperidone. Some of these recalls appear to have been conducted at the consumer level with refunds offered to consumers; others were conducted at the retail or wholesale level, and consumers were informed that the products were safe to use. The recalls were conducted for a variety of reasons, including concerns over subpotency, musty odors, erroneous or defective packaging, product texture, the presence of particulate matter, and the failure to disclose alcohol as an ingredient. Id. ¶¶ 197-98, 200-01, 207, 241, 251-54, 267-69, 271-301.*fn6

The plaintiffs aver that all of the products, not just those that were recalled at the consumer level, suffered from the cGMP issues that made them less valuable. SAC ¶ 376.

B. Deficiencies in the Recall Program For those products that were recalled starting in April 2010, the plaintiffs claim numerous deficiencies with respect to the nature and quality of the recall, including the recall announcement itself, which the plaintiffs claim was deliberately chosen to minimize consumer awareness of the program. SAC ¶ 5.*fn7

The refund offers coupons or cash refunds for consumers who contact the defendants by telephone or submit an online form with NDC numbers, lot numbers, and expiration dates to determine whether or not their drugs are subject to recall.*fn8 The offer does not note how the refund amounts are to be calculated. Id. ¶¶ 369-70.

The plaintiffs allege that the recall was inadequate because the refund offers did not fully and fairly compensate them for the costs they incurred as a result of the defendants' actions. Further, the plaintiffs allege that the J&J website "specifically advise[d]" individuals to discard used products, rendering them unable to provide the information required to obtain a refund. Id. ¶¶ 372, 377, 389. Plaintiffs' counsel, however, conceded that J&J made no specific instructions to discard recalled products, but instead that the named plaintiffs had discarded products as a result of what they heard in media reports or for other reasons. Tr. Hr'g 1/19/12 at 44-45.

The plaintiffs attach McNeil communications to the SAC to argue that (1) only the "average retail price" was offered as a refund; (2) the refund offer excluded sales taxes; and (3) the amounts offered were changed, demonstrating a failure to "properly value the retail prices paid" by the plaintiff class members; and (4) representatives "pushed worthless coupons" for items that would no longer be sold at retail. Id. ¶¶ 386-88 & Ex. I at McNeil-MDL-0000092. Additional costs claimed by the plaintiffs include those related to disposal, transportation to purchase replacement products, medical expenses incurred as a result of concerns of adverse reactions, and time spent investigating the recall. See id. ¶¶ 25-46.*fn9

C. Conspiracy Allegations

McNeil's quality control problems allegedly were caused by a series of oversight cutbacks instituted by J&J upper management, were longstanding, and were concealed purposefully.

1. Shareholder Suits and Special Committee Report

The SAC references a series of shareholder suits brought against J&J directors between February and November 2010 and the report of a Special Committee of the Board of Directors tasked with investigating these claims.*fn10 SAC ¶¶ 342-67. The defendants separately moved to strike these allegations under Federal Rule of Civil Procedure 12(f) as impertinent to the instant suit. Some of the suits alleged malfeasance by nonparties to this action, "off-label promotion" of J&J drugs, kickback schemes entered into with surgeons, and bribery of the Iraqi government. Others related to the issues described above, including insufficient quality controls at plants, FDA investigations, and product recalls. Except to the extent that these allegations go to the notice by the Board of Directors of cGMP issues at McNeil plants, this material is irrelevant and the Court will not go into greater detail regarding the shareholder suits and Special Committee investigation.

2. Earlier Quality Control Problems

Until 2002, J&J had a reputation for high quality control standards, although it was criticized by the FDA from time to time. Decisions by J&J management to conduct "repeated layoffs of experienced quality control staff" led to a deterioration of quality at McNeil plants in Fort Washington and Las Piedras, Puerto Rico. In spite of FDA concerns, McNeil quality control management overlooked or demanded manipulation of troublesome test results, and sold problematic products at full retail value. In 2007, for example, cuts to the corporate compliance department were approved, which resulted in a reduction in the quality of internal investigations. Indeed, the 2010 report was not the first time McNeil was aware of issues with its manufacturing and quality control procedures. The FDA noted in reviews in February 2008 and June 2009 that McNeil was not conducting adequate investigations. The FDA issued an Enforcement Report in January 2006 referring to foreign substances and subpotent dosages found in over-the-counter products sold by McNeil for children's use. SAC ¶¶ 175-85, 187-90, 316-19.

3. Individual Defendants

The plaintiffs allege the personal involvement of four executives in a conspiracy to downplay the seriousness of the quality control problems at McNeil plants. These individuals had personal knowledge of and responsibility for the deterioration in quality control at McNeil plants.

William Weldon, CEO and Chairman of J&J from April 25, 2002 through the relevant period, "had personal knowledge of the deplorable conditions" at the plants and "was responsible for the decisions that led to the degradation in quality" there. Weldon "opted to continue J&J's decentralized management and operational structure" when he joined. He was advised of J&J's compliance problems in 2005 or 2006, but decided to make significant cuts to its corporate compliance group in 2007 instead of improving it. When the 2010 recalls were occurring, he stated publicly that the issue was "not a systemic problem" at J&J. In testimony before Congress, he admitted the 2009 recall of Motrin IB--characterized as a "phantom recall" because it was conducted through contractor purchases of the product from stores and not announced to the public--should have been handled differently. The SAC adds the allegation that Weldon "knew or should have known" that J&J's decentralization strategy would result in cGMP problems. Id. ¶¶ 57, 109, 112, 114, 118, 191, 332.

Colleen Goggins is the former Worldwide Chairman of the J&J Consumer Healthcare Segment who left the company in early 2011. She reported directly to Weldon as part of the Group Operating Committee at J&J. Similar allegations are made against her with respect to her role in the cost-cutting in quality control processes and her actual or constructive knowledge that it caused the quality control problems identified at J&J. Finally, Goggins testified before Congress regarding the 2009 Motrin "phantom recall" and was contrite, but downplayed the problems as "minute." Id. ¶¶ 58, 115, 119, 325-27.

Peter Luther is the former president of McNeil, who held that post from January 2009 to April 2010. He served in a variety of J&J subsidiary executive posts between 1991 and 2010. He is alleged to have had personal knowledge of the conditions in the McNeil plants. He authorized the Motrin "phantom recall" and met with FDA officials to discuss their concerns over McNeil's noncompliance with regulations. On May 13, 2010, he signed a document containing "common questions" for consumers stating that they were eligible for refunds for the "average retail price" or replacement coupons. Luther is noted as having "introduced quarterly quality reviews and requested more substantive quality presentations." Id. ¶¶ 60, 121, 202, 308, 341, 386.

Rosemary Crane was a Company Group Chairman and chair of the Corporate Group Operating Committee for J&J, who reported directly to Weldon and was responsible for McNeil. In her role with the committee, she granted approval before any changes were made to the "operation or management of the plants." She is alleged to have been aware of the conditions in the plants, and of the fact that J&J's decentralization push would result in the cGMP problems that occurred. Id. ¶¶ 59, 97-98, 119.

D. Factual Allegations of Individual Named Plaintiffs

The SAC contains factual allegations specific to each of the twenty-four named plaintiffs, and describes the products each purchased and the approximate price he or she paid. The SAC then describes the NDC information of purchased products where it is available (or why the plaintiff is unable to provide such information), why each plaintiff did or did not contact the defendants about a refund, and the relief sought.

In its earlier opinion, the Court noted that the named plaintiffs did not fall into a "monolithic category," and that separate analyses of each plaintiff would be necessary upon any amendment. Mem. Op. 35-36. In concluding that the CAC had identified injuries that were "abstract and hypothetical, rather than distinct and palpable," the Court stated its confusion over how the allegations regarding the defendants' behavior were connected to an injury suffered by a named plaintiff. Id. at 26-27 (citing Danvers Motor Co., Inc. v. Ford Motor Co., 432 F.3d 286, 290-91 (3d Cir. 2005)).

Although each named plaintiff's allegations will be detailed below, the averments of the SAC lend themselves to the grouping of named plaintiffs into one or more of the following categories:

(1) Purchasers of non-recalled products who consumed them or have failed to allege how they suffered injury as a result of purchasing them;

(2) Purchasers of recalled products who have sought a refund or coupon and received one, or are waiting to receive one because of the terms of the offer;

(3) Purchasers of recalled products who are eligible for, but have not sought, a refund; and

(4) Plaintiffs who discarded products they purchased and thus no longer possess the information required to determine whether they are entitled to a refund.

With these categories in mind, the Court discusses the allegations of each named ...


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