Drugmaker's conflict-of-interest action can proceed

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January 19, 2012

Drugmaker's conflict-of-interest action can proceed 

Steven M. Sellers

Is a contingent-fee arrangement between a state attorney general and private law firms a conflict of interest? In an intriguing decision, a South Carolina court ruled that a declaratory judgment action by AstraZeneca on this issue can proceed because the drugmaker had stated “a valid claim for relief.” South Carolina had sued AstraZeneca for off-label marketing, retaining three law firms as special counsel, and those firms would share part of any damages award. The initial litigation alleges violations of South Carolina’s Unfair Trade Practices Act, for which a per-transaction civil fine may be imposed. AstraZeneca contends that the contingent-fee agreement is illegal because the case is the equivalent of a criminal case in which the prosecutor has a financial interest.

A declaratory judgment action filed by drugmaker AstraZeneca Pharmaceuticals has raised the thorny issue of whether a contingent-fee arrangement between a state attorney general and private law firms is a conflict of interest. The state had sued AstraZeneca for off-label marketing, retaining three law firms to serve as special counsel in the state’s case, and those firms would share part of any damages award against the drug company. The litigation alleges violations of South Carolina’s Unfair Trade Practices Act (SCUTPA), for which a per-transaction civil fine may be imposed.

AstraZeneca contends that the contingent-fee agreement is illegal because the case is the equivalent of a criminal case in which the prosecutor has a financial interest. South Carolina’s motion to dismiss the suit was denied by a state judge, who ruled that AstraZeneca had stated “a valid claim for relief.” (AstraZeneca Pharms. v. Wilson, No. 2011-CP-42-1213 (S.C. Cir. Dec. 20, 2011).)

South Carolina sued AstraZeneca for marketing the antipsychotic drug Seroquel off label, and the state seeks to recoup millions of dollars in Medicaid funds disbursed for unapproved uses of the drug, as well as monetary damages, equitable relief, and a $5,000 SCUTPA fine for each sale. AstraZeneca alleges that due process of law prohibits the attorney general from retaining outside counsel on a contingent-fee basis because SCUTPA is “akin to a criminal proceeding” or a law enforcement action that must be the result of “principled decision-making, untainted by financial incentives to prosecutors.”

Under the terms of the contingent-fee agreement, the attorney general has “final authority over all aspects of [the] litigation,” but the law firms receive contingent attorney fees on a sliding scale—up to a maximum of 23 percent of non-punitive damages and 10 percent of any punitive damages award.

South Carolina Attorney General Tom Wilson moved to dismiss the case on the ground that such contingent-fee arrangements were permissible under state law, but Judge Roger Couch was not persuaded. Noting that “both parties agree that prosecution of a criminal action by financially interested prosecutors violates the rights of the defendant,” the judge did not address the merits of whether SCUTPA civil penalties invoked the same considerations as criminal cases, but he ruled that the complaint “does state a valid claim for possible relief.”

States uniformly bar prosecutors from having a pecuniary interest in cases, but some state attorneys general have authorized similar contingent-fee agreements in civil cases. And while all states have unfair trade practices laws, it is not clear that fines imposed by such laws render their enforcement criminal in nature. The California Supreme Court recently held, for example, that public agencies may enter into contingent-fee agreements with outside counsel if neither a “liberty interest nor the right of an existing business to continued operation is threatened” by the prosecution and neutral government attorneys exercise control over the litigation.


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