Life-science companies often are cast into the role of the “canary in the coal mine” — the first parties to be targeted and hit by lawsuits. Such companies depend on discovery, trial and error, and ultimately efficacy. None of that is a sure bet. At the same time, life-science companies are raising funds constantly to finance their work. Investors and lenders seeing less-than-projected or even “expected” results might sue directors and officers for mismanagement, misrepresentation, or misleading financial statements.

This is true in cases with directors and officers (D&O) liability claims because a company’s financial prospects can be volatile and because investors often are overoptimistic. A company also can overstate product success and/or prospects. Care is needed in crafting D&O policy language to prevent coverage pitfalls. One example is the “insured versus insured” exclusion by which investors sitting on a board of directors may find their claim outside the scope of coverage.

It’s also not good enough for a life-science company’s risk manager to recognize only known problems; risks that companies are yet unaware of are the real problem. In the realm of products and professional liability (PPL), life-science companies are on the cutting edge of lifesaving solutions, but those solutions are unproven. Unexpected negative results lead to injury and litigation. It takes sharp focus and broad risk-management experience to see what loss exposures might be lurking about — now and in the future.

Here I examine four cases in each of those two categories. Some cases offer insurance lessons. Learning why these lawsuits occurred might help you to prevent something similar from happening. And these examples are educational for all types of companies.

Directors and Officers Liability
D&O suits primarily involve errors, omissions, wrongful statements, or conflicts of interest in company management. A claimant can be an investor and/or stockholder. Many D&O claims are based on sudden drops in the value of a company (if privately held) or in a company’s stock price. The latter can bring about what are known as stock-drop cases. Sometimes drops follow equally dramatic rises in stock prices based on information provided by the company.

Todd Hill v. MacroGenics: MacroGenics makes a margetuximab HER2 breast cancer drug. In early 2019, the company announced results of a clinical study touting a “24% risk reduction” in survival rates compared with those of a competing drug. Another announcement referred to “positive results from a pivotal . . . phase 3 study.” The stock soared over 130% on those press releases. Later in May, the American Society of Clinical Oncologists (ASCO) published its own analysis of the study results with a different view on how to measure the extent of the drug’s benefit, saying that it amounted to only a “0.9-month improvement” in the life of a patient (1). That initiated a continual series of drops in MacroGenics’s stock price.

The case is pending. But it seems that the most generous way to put it is that the company got far too “cute” in the way it expressed its drug’s outcomes, and it seems obvious that ASCO’s method of presenting it will be much more meaningful to doctors, patients, and stockholders. Straining to find a measure that produces a big number works only temporarily. Although market pressures push companies to create positive buzz, from a D&O standpoint, absolute accuracy and clarity are the best practices — those that will prevent litigation.

US Securities and Exchanges Commission (SEC) v. Mylan NV: This case concerns how a company should disclose risk factors in its public documents. The case is regulatory, not about stock price per se; it would have been a stock-drop case if not for Mylan’s size and diversification. This offers a lesson, though, for companies that are not in Mylan’s league and for whom such a matter would have been a much more serious crisis.

The SEC claimed in 2019 that Mylan made misleading statements in its annual reports from the previous year (2). The subject was Mylan’s EpiPen product for treatment of allergic reactions. When Mylan produced its SEC reports, the company had been involved in litigation with the federal government over whether the company had overcharged Medicaid for that product. Before settling with Medicaid, the company stated in its reports that “a governmental authority may take a contrary position on Mylan’s Medicaid submissions” (2) (emphasis added). Mylan eventually settled with Medicaid for US$465 million.

The company’s disclosure sounded like a generic, routine risk factor that would be in an annual report even if no specific action had been taken against it. In reality, when the company made those perfunctory-sounding statements, Medicaid already had advised Mylan that they were misclassified.

Mylan’s financial statements were misleading because they did not make an accrual for the expected financial loss. The SEC put it this way in announcing the $30-million settlement:

As alleged in the complaint, public companies facing possible material losses from a lawsuit or government investigation must (1) disclose the loss contingency if a loss is reasonably possible; and (2) record an accrual for the estimated loss if the loss is probably and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DOJ [US Department of Justice] investigation before October 2016, when it announced a $465-million settlement with DOJ. As a result, Mylan’s public filings were false and misleading. Further, as alleged in the complaint, Mylan’s 2014 and 2015 risk factor disclosures that ‘a governmental authority may take a contrary position on Mylan’s Medicaid submissions,’ when CMS [US Centers for Medicare and Medicaid Services] had already informed Mylan that EpiPen was misclassified, were misleading. (2)

If done by a smaller, less diversified company, Mylan’s actions would have been a D&O bomb given the “hidden” $465 million obligation.

Nobilis Health v. Great American Insurance: This case began with a series of separate stock-drop claims against Nobilis Health alleging misleading financial statements, including several rounds of financial restatements in which the company corrected previous errors. Downward adjustments to previously filed financials or to previously announced projections always have the possibility of leading to trouble. Nobilis is not a large company, and one of the complaints alleged that the company overstated one year’s annual revenue by $36 million. In fact, the company had restated several years of financials (3).

The obvious takeaway is to bend over backward with financial accuracy. But another main point is insurance related. The case involved D&O insurance and the related acts provisions included in all D&O policies. A company’s D&O program can involve several insurers over a span of several years. Insurer A might handle a claim in year one. Then, in year two, Insurer B could write the D&O, and a new claim is reported. But which insurer is responsible for the new claim? If the claim is “related” to the original, it will be sent back to Insurer A.

As you can expect, Insurer A wants to say that a claim is not related (and that it should go to B), whereas Insurer B wants to say that it is related and should go back to Insurer A. The result depends on the definitions of related acts in the two policies.
Great American Insurance was Nobilis’s insurer in year one, during which Hall v. Nobilis Health was submitted. Later, after Nobilis had changed insurers, two more stock-drop cases were submitted: Schott and Cappelli. Great American denied that the cases were related and so declined to take the claims. It is possible, though not stated in the case, that Nobilis had not renewed its D&O coverage, so no other insurer was in play to pick up the claim. Thus, Nobilis needed to sue Great American. In Nobilis Health v. Great American Insurance, the debate was settled with the judge determining that Great American had to defend.

Keep related acts in mind when dealing with D&O coverage in the midst of claim activity. Be careful when changing insurers, especially if there is claim activity. If you change insurers, compare the definitions in your expiring policy with those in its replacement to ensure that they are identical (unlikely) or that you understand the ramifications of the differences.

Rosalind Franklin University of Medicine and Science v. Lexington Insurance: Between 1989 and 2004, Rosalind Franklin University (RFU) conducted a clinical trial of a breast-cancer vaccine. At a midpoint in the study, RFU decided to discontinue it for various reasons that amounted to “medical judgment” (4). The trial subjects sued on the basis that they were harmed by discontinuance of the vaccine, which they believed was having a beneficial effect on them. (Incidentally, this is a novel type of claim that you might want to consider when drafting informed-consent forms.) RFU carried a healthcare-liability policy with Lexington that covered direct (medical) claims.

Indirect (nonmedical) claims also were filed, which RFU submitted to its D&O carrier. That is a common occurrence for which you should ensure you have secure coverage: an underlying claim for professional services (covered by professional liability) followed by a subsequent round of claims that are management related rather than directly professional. Those are subsequent indirect claims made, for example, by stakeholders concerned about reputational damage or by donors to the university or specific study. Subsequent claims should be covered by the D&O.

RFU’s D&O was written by Landmark American Insurance. Landmark denied coverage, and its denial was upheld by a court. The fatal flaw in the policy was harsh language regarding “medical or professional malpractice” exclusion. In D&O, insureds need to pay particular attention to prefatory language introducing the core of an exclusion. A company’s risk manager might agree that a core malpractice claim should not be covered by the D&O — it would be covered under a different policy designed for that situation. But companies do want coverage in a D&O for claims arising out of the core claim.

In RFU’s case, the preface read: “The insurer shall not be liable . . . in connection with any claim . . . based upon or attributable to any medical or professional malpractice.” What RFU needed instead was the less-exacting language that appears elsewhere in the same Landmark policy: “for any actual or alleged . . .” (4). With that preferred language, the actual core bodily injury claims would not have been covered by the D&O, but the management-related follow-on claim would be. In policy interpretation, subtle differences in wording can mean the difference between covered and bare.
(You might be wondering why the case name cites Lexington, not Landmark. Lexington was involved in that it was looking for participation by Landmark in the payment it had made to RFU.)

Product/Professional Liability
Life-science companies come into contact with the public both in the testing of products/services (e.g., during clinical trials) and when those products/services reach the market. Companies also might interact with other companies in some information- or revenue-sharing arrangement. Defects or hazards in products or errors in professional services can lead to injury and damages. Claimants can be customers, patients, and business associates.

Engleman v. Ethicon and Johnson & Johnson: This case involves injury allegedly caused by defects in a Johnson & Johnson (J&J) vaginal-mesh product. (Ethicon is a J&J unit.) The case went to trial, and plaintiff Margaret Engleman was awarded $15 million, $12.5 million of which were for punitive damages (5). The plaintiff provided voluminous documentation that J&J was aware of many complaints about the product but kept selling it. That was the likely basis for the punitives.
The case highlights two points:

• Understanding punitive damages (e.g., when, where, for what, and whether punitive damages can be awarded and whether they are insurable)
• Recognizing when to fight or settle — and knowing the implications of selecting one or the other.

Punitive damages are designed to punish a party for actions that are against public policy — to deter bad behavior. The 50 US states differ in their treatments of punitives. Variables by state include whether such damage

• exist as a remedy
• can be capped
• represent absolute dollars or percentages of compensatory damages
• are appropriate for the circumstances
• are insurable.

Companies always should try to negotiate for absence of a punitive-damages exclusion in a PPL policy — and even attempt to get a “most favorable venue” clause in their coverage. Such a clause states that of applicable venues for a case, the insurer will use the state most favorable to the insured in determining coverage of punitives.

On the fight-or-settle question, J&J is a good example because it tries to defend its product in court in many instances rather than settling. Settling can send a mixed message to a market concerning the safety of the product, and a company might want to defend that. But what might your insurer say about that?

Sometimes it feels like there is a conflict of interest between the insured and the insurer. To insurers, it is often a strictly financial decision: legal costs to defend weighed against how much less they can settle for. A life-science company with a reputation to uphold might view the situation in a completely opposite way.

You should arrange for language in your policy requiring an insurer to obtain your permission to settle. Be careful about the terms surrounding this issue. If you refuse to give permission, and the ultimate judgment is higher than what it could have been settled for, are you responsible for any of that overage? Often you will be responsible for a portion, expressed as a percentage of the overage, and you want that percentage to be as small as possible.

Karidis v. Takeda Pharmaceuticals: This case concerns a Takeda drug for gout that the plaintiff claimed caused his heart attack. In fact, in February 2019, the US Food and Drug Administration (FDA) did require the company to put a black-box warning on the drug for cardiovascular risks (6). The FDA’s description of a black-box warning is: “It appears on the prescription drug’s label and is designed to call attention to serious or life-threatening risks.” The warning literally is written in a black box on the label.

The plaintiff took the drug in 2016, before the warning label was applied, but claimed that Takeda already knew of the problems. And the plaintiff produced evidence including correspondence with the FDA. The plaintiff argued that the FDA’s approval of the drug was subject to the company’s conducting additional trials by a certain date in 2014, even before the date that the plaintiff started taking the drug. Thus, part of the case was based on Takeda’s failure to conduct the trials by that deadline. There were notices concerning the drug on the FDA website even before the black-box warning. Be cognizant that FDA actions involving drugs are available to the public — and that warnings to the public from a drug maker, with FDA actions, could be a factor in bringing and defending lawsuits.

Admiral Insurance Co. v. Superior Court, Respondent (A Perfect Match): In this case, Admiral Insurance petitioned a court for interpretation of the PPL policy it issued to A Perfect Match, a company that arranges egg donors for infertile families. A baby was born with a genetic defect, and A Perfect Match was accused in the lawsuit of improper donor screening (7). This case highlights a critical insurance subject: claim reporting. Admiral denied the claim based on failure to report, and the court upheld its position.

Insurance policies have reporting requirements that are triggered at different points depending on their language. When a policy is of the claims-made variety (most D&O and professional liability policies), this is particularly critical. Claims-made policies respond to claims filed against the insured during a policy period. Such policies also allow you to report an “incident” or “circumstance” during the policy period with the promise that if it does become an actual claim at a later date, the policy will cover it as though it were made during the policy period. A later policy, enacted in the next year, will not cover claims resulting from circumstances that you were aware of but did not report. That provision is called a knowledge clause. When circumstances occur during one policy period and then the policy expires and renews, the insured must be careful in how to report.

A Perfect Match made the following mistakes. In year one, they received three letters from the plaintiff’s attorney announcing plans to file a complaint. A Perfect Match did not report those notices to the insurer in year one. The suit appeared in year two, at which time the company did report, but its insurer held it subject to an exclusion for claims about which it had “knowledge” before the policy period.

The combination of circumstances known and a policy about to expire can be a dangerous mix if not handled correctly. Knowing how and when to report circumstances — and actual claims — is an art in itself. It requires dealing with the complexities of policy language combined with uncertainties about the future development of simple circumstances that haven’t ripened yet into full-blown claims. By no means should you attempt to handle such claims without understanding your policy’s terms and conditions.

Advanced Medical Optics (AMO) v. Cytosol Labs: Cytosol supplied a salt solution to AMO for resale to the medical community for optical applications including eye surgery. Advanced Medical Optics (AMO) started receiving complaints about toxicity from its customers, and shortly thereafter Cytosol received a recall notice from the FDA. AMO claimed damages against Cytosol related to those suffered by its customers and for its own recall costs (8).

Examining this case brings up several insurance points. Cytosol reported the AMO claim to Chubb, its insurer, and litigation between Chubb and Cytosol ensued. Chubb emerged with a verdict confirming its denial. The real issue was the type of insurance Cytosol carried, not the quality of the insurance. Cytosol had purchased from Chubb a products-liability policy that would have covered Cytosol if (and when) claims came from claimants who suffered bodily injury. PL covers claims for bodily injury and property damage. As such, it won’t cover claims for product-recall costs (incurred by Cytosol itself or by its customers) or for claims against the insured made by its customers for damages to profits, market share, or reputation. The lesson here is awareness of the need in some cases for both product-recall coverage and manufacturer’s errors and omissions (Mfg E&O) in addition to product liability.

To summarize: Product liability covers claims of persons injured by a defective product, such as a serious reaction to a drug. Product-recall coverage addresses costs of the insured in recalling its own product from the marketplace and related costs such as public-relations consulting and legal expenses. Such policies also may be structured to cover recall costs of the insured’s downstream customers as well. Mfg E&O liability covers economic loss by the insured’s customers related to a problem with the insured’s product (e.g., reputational damage, loss of revenue and market share, and related expenses).

Know Your Stuff
Defective products can generate liabilities in a number of ways, each of which might need its own policy to supply a remedy. But all companies should understand how liability policies work. This is particularly true of life-science companies because they are the vanguard of discovery and innovation.

References
1 Todd Hill v. MacroGenics, et al. (8:19-cv-02713GJH). Stanford Law School Securities Class Action Clearinghouse, 2019; http://securities.stanford.edu/filings-documents/1071/MI00_15/2019913_f01c_19CV02713.pdf.

2 Mylan to Pay $30 Million for Disclosure and Accounting Failures Relating to EpiPen. US Securities and Exchanges Commission: Washington, DC, 27 September 2019; https://www.sec.gov/litigation/litreleases/2019/lr24621.htm.

3 Nobilis Health v. Great American Insurance (4:17-cv-02386). Justia 4 October 2018; https://law.justia.com/cases/federal/district-courts/texas/txsdce/4:2017cv02386/1447095/40.

4 Rosalind Franklin University of Medicine and Science v. Lexington Insurance (1-11-3755). FindLaw 7 March 2014; https://caselaw.findlaw.com/il-court-of-appeals/1659684.html.

5 Margaret Engleman v. Ethicon and Johnson & Johnson (J-A25038-18). Casetext 20 September 2019; https://casetext.com/case/engleman-v-ethicon-inc.

6 Karidis v. Takeda Pharmaceuticals USA, et al. (1:19-cv-07060). Justia 28 October 2019; https://dockets.justia.com/docket/illinois/ilndce/1:2019cv07060/370041.

7 Admiral Insurance v. Superior Court (A Perfect Match, Inc.). Justia 12 December 2017; https://law.justia.com/cases/california/court-of-appeal/2017/d072267.html.

8 Cytosol Laboratories v. Federal Insurance, et al. (1:2006cv12129). Justia 24 November 2006; https://dockets.justia.com/docket/massachusetts/madce/ 1:2006cv12129/ 106501.