On December 14, 2016, Cohen Milstein and several other firms filed a consolidated civil RICO class action complaint on behalf of plaintiffs including Cohen Milstein’s client, New York Hotel Trades Council & Hotel Association of New York City, Inc. Health Benefits Fund (“NYHTC”), in the U.S. District Court, District of New Jersey, against Valeant Pharmaceuticals International Inc., Andrew Davenport, who had been chief executive of the specialty pharmacy Philidor RX Services LLC, and Matthew Davenport, who allegedly held himself out as Philidor’s CEO in documents filed with the California State Board of Pharmacy.  The proposed class action alleges that the company’s relationship with specialty mail-order pharmacy Philidor was illegal and allowed Valeant to overcharge and wrongly charge third-party payors  (“TPPs”) for prescription drugs in violation of the Racketeer Influenced and Corrupt Organizations Act and the New York Consumer Protection Act. 

On August 9, 2017 Judge Michael A. Shipp for the District of New Jersey granted Andrew and Matthew Davenport’s Motion to Stay the lawsuit, pending criminal trials. Motions to dismiss have been fully briefed.

Case Background

This civil RICO class action arises from a fraudulent scheme perpetrated by Valeant, its top executives, and Defendants Andrew and Matthew S. Davenport, co-conspirators at Philidor, a specialty pharmacy, to use a secret network of captive pharmacies to shield Valeant drugs from competition, fraudulently inflate the prices of Valeant products, and artificially boost Valeant’s sales. Valeant and its secret network of pharmacies and shell corporations named after various chess strategies were created and controlled by the Defendants for the purpose of selling Valeant drugs (the “Valeant Enterprise”) and provided a platform through which Defendants implemented the aforementioned fraudulent practices. The Valeant Enterprise’s misconduct was so vast in execution that media and commentators have dubbed it the “Pharmaceutical Enron.” 

The key to Valeant’s apparent success was the Company’s practice of massively raising the prices of drugs it obtained through its serial acquisitions. In 2015 alone, Valeant raised prices on its branded drugs an average of 66%, according to a Deutsche Bank analysis—approximately five times as much as its closest industry peers. Absent the scheme Defendants implemented through the Valeant Enterprise, Valeant’s bloated drug prices would have been unsustainable in the face of competition from these cheaper generic alternatives. Many state laws and many contracts entered into by and on behalf of TPPs, require substitution of generics for Valeant’s expensive brand-name drugs, unless precluded by the prescribing physician. However, Defendants provided customers with coupons and waived patient co-pays to discourage the use of available, cheaper generic alternatives and to steer customers to their more expensive branded drugs. The success of Defendants’ scheme hinged on its secrecy. Defendants issued a host of false and misleading statements to a number of constituencies, including TPPs, Pharmacy Benefit Managers, and state regulators, designed to conceal Valeant’s relationship with its captive pharmacies and its improper use of the secret pharmacy network to inflate drug prices and sales. 

Shortly after Valeant’s relationship with Philidor was revealed, the three largest pharmacy benefit managers in the United States, CVS Health Corp., Express Scripts Holding Co., and UnitedHealth Group Inc.’s OptumRx, all announced that they were dropping Philidor from their networks. On October 30, 2015, after the disclosure of the Valeant-Philidor relationship and the existence of Valeant’s captive pharmacy network, Valeant announced that it had terminated its relationship with Philidor. Valeant also announced in October 2015, that it had received a subpoena issued as part of a criminal investigation into possible violations of federal health-care laws. In March 2016, Pearson, Valeant’s CEO during the Class Period, was forced to resign as a result of numerous government investigations, as well as investor and public scrutiny into Valeant’s misconduct.

In re Valeant Pharmaceuticals International, Inc. Third-Party Payor Litigation, Case No. 16-3087 (MAS)(LHG), U.S. District Court for the Southern District of New York