R. Matthew Neff: Bankruptcy court will bring order to opioid liability

The recent lawsuits against manufacturers of opioids (including Purdue Pharma, Johnson & Johnson, Mallinckrodt and others) bear a striking similarity to lawsuits against the tobacco companies a few years ago.

Both industries are accused of producing products that harmed consumers and being liable for their disregard of the public health, in spite of being regulated by the federal government.

Warnings on cigarette boxes grew increasingly direct about the risks, to the point of being graphic. Opioids could be provided only with a doctor’s prescription, and even the doctor’s prescribing activity came to be regulated.

And as with tobacco, the public is astounded to learn the scope and magnitude of the deception that led to excessive opioid use and abuse. In the case of tobacco, it was not only the manufacturers, but also the distributors and retailers that formed part of a distribution chain that fed an addiction. My dad started smoking during World War II because the Army gave everyone (including 18-year-old privates) cigarettes. In the case of opioids, the largest single prescriber was the Veterans Administration.

The opioid epidemic was fueled by a supply chain that chose to look the other way as all saw a train wreck coming. Not just manufacturers—but also distributors, retailers, prescribers and labs—all played a role and took a piece of an economic pie that was too big to overlook. Now the cleanup begins.

Lawsuits are good for isolated acts of malfeasance, but they are not the best way to resolve societal liability issues like the opioid epidemic. The facts of the cases are so varied, the parties so diverse, and the scope of the problem so broad that even multi-district class action lawsuits are challenged to manage the process.

Fortunately, our legal system has a mechanism that can best manage broad societal liability issues like the opioid epidemic: bankruptcy. Bankruptcy courts are equipped to do things others can’t do and that the legislative process certainly doesn’t have the will to address.

Principal among the bankruptcy processes are stays of litigation that funnel all liability claims into one forum, the bankruptcy court. This is where we have seen Purdue Pharma head. By declaring bankruptcy, Purdue put on hold actions against it around the country and can consolidate its resources in one forum.

This is actually good, because it preserves the assets of Purdue for the people who have been harmed. Otherwise, the Purdue resources would be drained by years of legal fees and associated litigation expenses, likely resulting in the complete liquidation of the company. Bankruptcy permits Purdue to continue to operate, even as settlement arrangements are made.

An interesting aspect of this process is the liability allegations against the Sackler family, owners of Purdue. The Sacklers have received billions of dollars of profits from Purdue over the years; should they be made to contribute to the resolution of the claims as well? The Sacklers have offered to pitch in several billion dollars at this point in order to buy peace.

Early in my career, I represented a bank that was near failure and an affiliated finance company that had issued unregistered securities. The board members were going to be held liable for both the bank failure and securities fraud. By steering the finance company into bankruptcy and having the directors and their liability insurer kick in a few million dollars, we were able to persuade the bankruptcy court to bless a settlement of all claims, one that also provided relief to the directors.

Happily, the bank survived and the directors were able to resume a normal life, with most of their assets intact. The creditors received far more than they would have otherwise.

I think we will see something similar play out in the opioid case. The alternative for the manufacturers, the owners and other parties in the potential chain of responsible parties is so bad that bankruptcy court might look like a sea of tranquility. To let the process play out otherwise would exact a large toll on society and our court system, and benefit only the lawyers.

Consequently, my guess is that bankruptcy court will seize the lead role in resolving these liability claims in an orderly fashion, including managing how the Sacklers contribute to the resolution of the problem. Big dollars will change hands, but in an orderly process.•

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R. Matthew Neff is of counsel at Bingham Greenebaum Doll and a senior adviser to Evolution Capital Partners.