No. 10-1173

IN THE

,upr m aurt of tnit b

SERGEANTS BENEVOLENT ASSOCIATION HEALTH AND

WELFARE FUND, ON BEHALF OF THEMSELVES AND

OTHERS SIMILARLY SITUATED, ET AL.,

Petitioners,V.

ELI LILLY AND COMPANY,Respondent.

On Petition for a Writ of Certiorarito the United States Court of Appeals

for the Second Circuit

BRIEF OF DR. BRIAN C. BECKER, DR. SARAFISHER ELLISON, AND DR. JOSEPH R. MASON

AS AMICI CURIAE IN SUPPORT OF PETITIONERS

April 25, 2011

DAVID L. BROWNE

Counsel of RecordTHE LAW OFFICES OF

DAVID L. BROWNE, L.L.C.

One Canal PlaceSuite 1000365 Canal StreetNew Orleans, LA 70130(504) 648-0181(dbrowne@b ro wnelaw, co m)

B~ank Page

TABLE OF CONTENTSPage

TABLE OF AUTHORITIES .......................................ii

INTEREST OF AMICI CURIAE ................................1

ARGUMENT ...............................................................4

I. THE ECONOMIC ORGANIZATION OFTHE PHARMACEUTICAL INDUSTRY ........6

A. Prescription DrugMarket ........................6

B. Prescription Drug Advertising .................8

II. WITHOUT THIS COURT’S INTER-VENTION, THE COURT OF APPEALS’DECISION WILL PERVERSELYINCENTIVIZE PHARMACEUTICALCOMPANIES TO USE FRAUDULENTMARKETING TO INCREASE DRUGCOSTS ...........................................................11

III. SIZE OF ECONOMIC IMPLICATIONS .......17

IV. SUMMARY ....................................................17

CONCLUSION ..........................................................18

APPENDIX:

Figure I ...............................................................la

Figure 2 ...............................................................2a

Figure 3 ...............................................................3a

Figure 4 ...............................................................4a

ii

TABLE OF AUTHORITIESPage

STATUTES, REGULATIONS, AND RULES

Federal Food, Drug, and Cosmetic Act,§ 502(n), 21 U.S.C. § 352(n) ................................10

Sup. Ct. R. 37.2(a) .......................................................1

Sup. Ct. R. 37.6 ...........................................................1

ADMINISTRATIVE MATERIALS

U.S. Dep’t of Justice, Press Release, Eli Lillyand Company Agrees to Pay $1.415 Billionto Resolve Allegations of Off-Label Promo-tion of Zyprexa (Apr. 18, 2011)~ available athttp ://www.j ustice, gov/op a/pr/2009/January/09-civ-038.html ....................................................16

U.S. Food and Drug Administration, An FDAGuide to Drug Safety Terms (Apr. 15,2011), available at http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm 107970.htm .......................................................................10

UoS. Food and Drug Administration, Back-ground on Drug Advertising (Apr. 15, 2011),available at http://www.fda, gov/Drugs/ResourcesForYou/Consumers/PrescriptionDrugAdvertising/ucm071964.htm ......................10

iii

U.S. Food and Drug Administration, TruthfulPrescription Drug Advertising and Promo-tion (Bad Ad Program) (Apr. 15, 2011),available at http://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/Surveillance/DrugMarketingAdvertisingandCommunications/ucm209384.htm ............9, 10,

Figure 2

OTHER MATERIALS

Ernst R. Berndt, Pharmaceuticals in U.S.Health Care: Determinants of Quantityand Price, 16 J. Econ. Persp. 45 (2002) ..............15

Mary-Margaret Chren & Seth Landefeld, Phy-sicians’ Behavior and their Interactionswith Drug Companies, 271 JAMA 684(1994) ...................................................................13

William S. Comanor & Z. John Lu, StrategicPricing of New Pharmaceuticals, 80 Rev.Econ. Stat. 108 (1998) .........................................15

Dhaval Dave & Henry Saffer, The Impact ofDirect-to-Consumer Advertising on Phar-maceutical Prices and Demand, NBERWorking Paper No. 15969 (2010) ......... 14, Figure 2

Eli Lilly and Company, Form 10-K for theFiscal year Ended December 31, 2001 (Mar.28, 2002) ..................................................... Figure 4

Eli Lilly and Company, Form 10-K for theFiscal year Ended December 31, 2002 (Mar.20, 2003) ..................................................... Figure 4

iv

Eli Lilly and Company, Form I O-K for theFiscal year Ended December 31, 2003 (Mar.15, 2004) ..................................................... Figure 4

Eli Lilly and Company, Form 10-K for theFiscal year Ended December 31, 2004 (Mar.8, 2005) ....................................................... Figure 4

Eli Lilly and Company, Form 10-K for theFiscal year Ended December 31, 2005 (Mar.1, 2006) ....................................................... Figure 4

IMS Health (Apr. 20, 2011), available athttp://www.imshealth.com ........................ Figure 4

Darrell L. Hueth, Richard E. Just & AndrewSchmitz, The Welfare Economics of PublicPolicy: A Practical Approach to Project andPolicy Evaluation (Edward Elgar Publish-ing Limited 2004) ................................................11

William Landes & Richard Posner, A PositiveEconomic Analysis of Products Liability, 14J. Legal Stud. 535 (1985) ....................................16

William Landes & Richard Posner, Tort Lawas a Regulatory Regime for CatastrophicPersonal Injuries, 13 J. Legal Stud. 417(1984) ...................................................................16

Janet Lundy, Prescription Drug Trends, TheHenry J. Kaiser Family Foundation(2010) ................................................ 7, 16, Figure 3

Gregory N. Mankiw, Principles of Economics(4th ed. South-Western 2007) ................... Figure 1

Christie Provost Peters, Fundamentals ofthe Prescription Drug Market, Nat’l HealthPolicy Forum 15 (Aug. 2004) ..................... Figure 2

V

John Rizzo, Advertising and Competition inthe Ethical Pharmaceutical Industry: TheCase of Antihypertensive Drugs, 42 J.L.Econ. 89 (1999) ....................................................14

Steven Shavell, A Model of the Optimal Use ofLiability and Safety Regulation, 15 RANDJ. Econ. 271 (1984) ..............................................16

Dennis E. Smallwood & John Conlisk, ProductQuality In Markets Where Consumers AreImperfectly Informed, 93 Q.J. Econ. 18(1979) ...................................................................12

George J. Stigler, The Economics of Informa-tion, 69 J. Pol. Econ. 213 (1961) ..........................11

Joseph Stiglitz & Steven Salop, Bargains andRipoffs: A Model of Monopolistically Com-petitive Price Dispersion, 44 Rev. Econ.Stud. 493 (1977) ...................................................12

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INTEREST OF AMICI CURIAE1

Amici are professional economists and academics.Amici wish to ensure that the Court properly as-sesses the economic significance that fraudulentmarketing has on the prescription drug industry indeciding whether to grant petitioners’ writ. Amicihave no stake in the outcome of this case. They arefiling this brief solely as individuals and not on be-half of the institutions with which they are affiliated.

Dr. Brian C. Becker is the founder and President ofPrecision Economics, LLC. Dr. Becker has producedmore than 400 economic expert reports for Fortune500 corporations, international law firms, the Inter-nal Revenue Service, the Australian Taxation Office,and the Canada Revenue Agency. Focusing on trans-fer pricing, valuation, damage calculations, and anti-dumping analysis, Dr. Becker has testified in a num-ber of legal venues, including U.S. Tax Court, TheTax Court of Canada, The Australian AdministrativeAppeals Tribunal, The Federal Court of Australia,The Canadian International Trade Tribunal, Dela-

1 Pursuant to Supreme Court Rule 37.6, counsel for amici

represents that no counsel for a party authored this brief inwhole or in part and that none of the parties or their counsel,nor any other person or entity other than amici or their counsel,made a monetary contribution intended to fund the preparationor submission of this brief. Counsel for amici notes that, untilMay 2006, he and James Dugan, one of the counsel for petition-ers, practiced law together in the firm Dugan & Browne, PLC.Counsel for amici has not personally represented any of thepetitioners in connection with this matter and has no financialinterest in the outcome of this litigation. Pursuant to Rule37.2(a), counsel for amici represents that all parties were pro-vided notice of amici’s intention to file this brief at least 10 daysbefore its due date. This brief is filed with the written consentof the parties, reflected in letters on file with the Clerk.

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ware Chancery Court, and The U.S. InternationalTrade Commission. In addition to this expert wit-ness experience, Dr. Becker has: (a) published morethan two dozen papers/book chapters; and (b) servedas a Visiting Professor in the business schools of fouruniversities. Dr. Becker received a B.A. in AppliedMathematics and Economics from the Johns HopkinsUniversity and a M.A. and Ph.D. in Applied Econom-ics from the Wharton School of the University ofPennsylvania.

Dr. Sara Fisher Ellison is currently Senior Lectur-er in the MIT Economics Department, and has pre-viously been the Richard B. Fisher member at theInstitute for Advanced Study (2003-2004), the ArchShaw National Fellow at the Hoover Institution(1999-2000), and a Research Economist at the Na-tional Bureau of Economic Research (1992-1994).Her recent research has investigated a number ofquestions in industrial organization, with a focus onthe pharmaceutical industry and e-commerce. Herwork on the pharmaceutical industry has been wide-ranging, addressing issues such as the characteris-tics of demand for similar products, the politicaleconomy of pharmaceutical pricing, and the strategicbehavior of pharmaceutical manufacturers. Ine-commerce, her best known research involves thestudy of search and obfuscation. She is an award-winning teacher, and her courses include econo-metrics and industrial organization at the Ph.D. level,econometrics and applied microeconomics at theMBA level, and econometrics at the undergraduatelevel. She currently serves on the editorial board ofthree industrial organization journals, IJIO, JIE, andRIO. She also has consulting experience, providinglitigation support and management guidance. Dr.

Ellison received a B.S. in Mathematics and Statisticsfrom Purdue University in 1987, a diploma of Ad-vanced Study in Mathematical Statistics from Cam-bridge University in 1988, and a Ph.D. in Economicsfrom the Massachusetts Institute of Technology in1993.

Dr. Joseph R. Mason is the Moyse/LBA Chair ofBanking at the Ourso School of Business at Louisi-ana State University, and Senior Fellow at theWharton School. Dr. Mason’s academic researchfocuses primarily on investigating liquidity in thinlytraded assets and illiquid market conditions. Cur-rent academic research projects analyze default risk,including both immediate and cross-default risk, anddefault resolution costs in the contexts of asset-backed securities, in systemic and non-systemicenvironments, as well as the efficacy of bailout andresolution policies through the history of financialmarkets. His research and economic commentaryhas received hundreds of national and internationalpress citations in publications such as the Wall StreetJournal, New York Times, Washington Times, TheEconomist, Financial Times, Barrons, Business Week,die Zeit, Neue Ziircher Zeitung, Financial Times-Germany, Los Echos, Forbes, Fortune, Portfolio Mag-azine, Bloomberg Magazine, American Banker, andon press syndicates such as Associated Press, Reu-ters, Bloomberg, KnightRidder, and MarketWatch-Dow Jones Newswire. Dr. Mason received a B.S. ineconomics from Arizona State University in 1990 anda Ph.D. from the University of Illinois in 1996.

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ARGUMENTAs economists, amici believe that this case

presents a critical issue for the health-care industry,which represents a substantial and growing share ofthe National economy. As petitioners explain, thecourt of appeals’ decision in this case has createdsubstantial confusion regarding the legal rules gov-erning lawsuits by private health-benefit providers,or third-party payors, against pharmaceutical manu-facturers for the fraudulent marketing of prescrip-tion drugs. Amici write to elaborate on the economicsignificance of that confusion for the industry andthe broader economy. Amici encourage this Court togrant petitioners’ writ and remedy the economic con-fusion the Second Circuit’s decision created.

In analyzing this decision, we understand the gen-eral facts of this matter to be:

¯ Respondent fraudulently advertised thedrug, Zyprexa, and such actions caused themarket price of the product to increase.

¯ Respondent directed its fraudulent adver-tising to physicians and patients.

¯ For most purchases (prescriptions)2 ofZyprexa, patients and doctors make littleor no payment. See Figure 3.

¯ Unlike typical economic markets whereadvertising is directed to the product’sultimate payors, private and Governmentalthird-party payors are responsible for pay-ing the majority of the cost of pharmaceuti-cals. See Figure 3. Thus, the damage to

2 We have not been provided specific figures for the purchas-ers of Zyprexa. Unless otherwise stated, we refer to the overallmarket summarized in Figure 3.

fraudulently inflated prices is on privateand Governmental third-party payors.

¯ In this case, the Governmental third-partypayors were "made whole" from their lossthrough a lawsuit directed at respondent.

¯ In this case, private third-party payors(representing approximately half of thetotal payment for pharmaceuticals) werenot made whole by suing respondent, as theSecond Circuit ruled that these entitieswere not the target of the fraudulent adver-tising.

Given these facts, we believe that third-partypayors should be allowed to sue for damages result-ing from fraudulent advertising. To the extent thatthe fraudulent advertising results in increased sales,an increased price, or both, and to the extent thatthose sales are being paid for by a third party asopposed to the physician or patient, the third partyis bearing economic costs and should be allowed tosue to be made whole. In addition, in typical (non-pharmaceutical) economic markets, corporationshave a disincentive to market fraudulently in that allof the damaged parties may sue to be made whole,which would potentially eliminate all incrementalprofits from such acts. If corporations, like respon-dent, know they can profit from fraudulent market-ing with the potential of only a portion of such profitto be paid back to purchasers to be made whole, theyare left with an economic incentive to engage in thatfraudulent activity.

In this brief, we discuss the unusual structure ofthe market for prescription pharmaceuticals. It isthis unusual structure that gives rise to the situationwhere three or more parties could be involved in

(i) exposure to advertising, (ii) decision to purchase,(iii) payment, and (iv) consumption of the product.(In a canonical market, the "consumer" typically per-forms all four of those functions himself.) We alsodiscuss the central role that advertising plays in themarket for prescription pharmaceuticals, as demon-strated by the large advertising expenditures madeby the manufacturers. The importance of advertisingin this market is due in part to an asymmetry ofinformation between the manufacturer and the phy-sician and patient. Advertising also assumes a largerole because the unusual structure of the marketattenuates the price sensitivity of the parties makingthe purchase decision. We discuss a number of aca-demic studies that elucidate these points.

I. THE ECONOMIC ORGANIZATION OF THEPHARMACEUTICAL INDUSTRY

A. Prescription Drug MarketThe market for prescription pharmaceuticals has

always diverged from what economic models treat asthe typical, or canonical, market. In particular, therehas always been a separation between the decisionmaker, the physician writing a prescription, and thetraditional payor and consumer, the patient takingthe drug. In recent years, however, this market hasdiverged even further from the typical economicmarket. Increasingly, payment for the drug has alsobeen separated from both the decision to purchaseand the consumption of the drug. In 1990, consumerout-of-pocket spending represented approximately 56percent of total prescription drug expenditures, withprivate insurance and public funds splitting the re-maining share. By 2005, however, consumers wereno longer paying the bulk of prescription costs, withtheir share down to 24 percent and private health

7

insurance spending up at 48 percent.3 See Figure 3.Thus, in the pharmaceutical market, there is now asignificant structural separation between consumersand the institutions that pay for their prescriptions.

Typically, economic transactions can be analyzedthrough the use of standard economic models wherethere is an exchange of goods and services betweentwo parties, a buyer and a seller. Under such cir-cumstances, the buyer attempts to pay as little aspossible and the seller attempts to extract as high aprice as possible--with the ultimate price fallingsomewhere in the middle depending on the positions/bargaining power of the two parties. See Figure 1.In this type of market, fraudulent activity of the sel-ler would typically directly harm the buyer.

The market for prescription drugs, however, is un-like the typical market for consumer goods. Prescrip-tion drugs are seldom exchanged directly betweenconsumer and producer. Rather, multiple entitiesare involved including patients, physicians, drugcompanies, and, in some cases, third-party payors.See Figure 2.

The presence of these various actors in a singletransaction complicates the classic economic modelof supply and demand. Under the current system,the patient neither pays for nor chooses the good.Instead, physicians decide what drugs to prescribeand third-party payors purchase the prescriptions onbehalf of patients. This complex set of relationshipsseparates the patient (consumer) from the drugcompany (producer). In these situations, fraudulentactivity by the seller that artificially inflates price

~ See Janet Lundy, Prescription Drug Trends, The Henry J.Kaiser Family Foundation 2 (2010).

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will directly harm not the consumer, but rather thethird-party payor.4 See Figure 2.

B. Prescription Drug Advertising

The pharmaceutical industry is unusual in otherways as well. Unlike many other markets, it ischaracterized by the central and important role thatadvertising plays. There are a number of factors thatinfluence the nature of pharmaceutical advertisingand contribute to its importance. First is the struc-ture of the market discussed above. In such a situa-tion, we would expect pharmaceutical companies toengage in advertising directed primarily at the deci-sion maker, the physician, but also, perhaps, to thepatient, who could influence the physician’s decision.We would also expect the advertising to focus ondrug characteristics, not prices, because the targetsof their advertising are typically not bearing the costof the drug.

Second is the asymmetric information that charac-terizes the pharmaceutical market. In particular,pharmaceutical companies, which run clinical trialsand have access to a large amount of information onthe safety and efficacy of their drugs, would knowmuch more about a product’s characteristics thanpatients, or even relatively well-informed physicians,would.

Finally, the content of pharmaceutical advertisingis subject to strict regulations by the Food and Drug

4 The market for insurance premiums operates under anassumption of truthful information/marketing. Third-partypayors would (attempt to) charge higher premiums after discov-ering fraudulent marketing. However, they would suffer lossesduring the time before such fraudulent activity is discovered.In that sense, insurance companies may not retroactively increaseprior insurance premiums.

9

Administration ("FDA"). The strict regulations,coupled with the asymmetry of information, lead toan unusual reliance by physicians and patients onadvertising by the manufacturer.

Since pharmaceutical companies know far moreabout the efficacy of the drugs that they create thanconsumers and even the physicians who act as con-sumers’ agents, physicians and patients must rely,therefore, on the information contained in the adver-tising materials to make as well-informed a decisionas possible. FDA regulations on the content ofpharmaceutical advertising provide assurances of thescientific accuracy of advertised claims. According tothose regulations, pharmaceutical sales representa-tives must communicate complete information con-cerning benefits and side-effects, and cannot distortfacts about their own products or competitors’ prod-ucts.5 For example, information regarding efficacymust be presented with the associated risks, to pre-vent a misleading profile of the drug. The FDA alsorequires that drug marketers only use informationthat is supported by sound evidence from clinicalstudies.6 Furthermore, it is prohibited for companiesto market drugs for unapproved uses. Indeed, theFDA mandates "prescription drug labeling," which

5 See, U.S. Food and Drug Administration, Truthful Prescrip-tion Drug Advertising and Promotion (Bad Ad Program) (Apr.15, 2011), available at http://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/Surveillance/DrugMarketingAdvertisingandCommunications/ucm209384.htm.

6 See id.; Federal Food, Drug, and Cosmetic Act, § 502(n), 21U.S.C. § 352(n); U.S. Food and Drug Administration, Backgroundon Drug Advertising (Apr. 15, 2011), available at http://www.fda.gov/Drugs/ResourcesForYou/Consumers/PrescriptionDrugAdvertising/ucm071964.htm.

10

requires full disclosure about what a prescriptionmedicine is supposed to do, who should and shouldnot take it, and how to use it.7 Asymmetric informa-tion coupled with these strict regulations ensuresthat pharmaceutical advertising is an importantsource of information for physicians and patients.

Although all of these factors affect the importanceof advertising in this market and the likelihood thatadvertising will result in higher profits for the manu-facturers, we take the large advertising budgets ofthe manufacturers as de facto evidence that adver-tising increases sales, allows the manufacturers toincrease price, or both. Otherwise, they would notengage in these expenditures.

This is not surprising given that the safety andefficacy of a drug, as well as the conditions for whichit is approved, should determine the price a companycan charge and the volume it sells, and these arecharacteristics conveyed by advertising. Companies,therefore, face strong incentives to design their ad-vertising to highlight the drug’s therapeutic advan-tages and suggest wide applicability.

~ See U.S. Food and Drug Administration, An FDA Guide toDrug Safety Terms (Apr. 15, 2011), available at http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm 107970.htm.

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II. WITHOUT THIS COURT’S INTERVEN-TION, THE COURT OF APPEALS’ DECI-SION WILL PERVERSELY INCENTIVIZEPHARMACEUTICAL COMPANIES TO USEFRAUDULENT MARKETING TO INCREASEDRUG COSTS

In the 1960s, Nobel Laureate George Stiglercreated a revolution in economic thought by analyz-ing information as a scarce commodity. In analyzinginformation as an economic good in and of itself,Professor Stigler recognized that, like any other eco-nomic commodity, financial and institutional incen-tives affect the information available to consumers.See George J. Stigler, The Economics of Information,69 J. Pol. Econ. 213-225 (1961).

Economists evaluate the consequences of market-ing in terms of the economics of information. Whenadvertising reduces consumers’ costs of acquiring in-formation, it increases economic efficiency by facili-tating mutually beneficial transactions between sel-lers and buyers. However, economists also recognizethat, when sellers suppress information that wouldaffect buyers’ valuations of the sellers’ products,advertising can be used as a tool to mislead unawareconsumers. Under typical conditions, misleadingadvertising misallocates scares resources and there-fore reduces consumer surplus--consumers end upwith products they do not value, money is pouredinto economically destructive marketing schemes,and prices will exceed the efficient level. See DarrellL. Hueth, Richard E. Just & Andrew Schmitz, TheWelfare Economics of Public Policy: A Practical Ap-proach to Project and Policy Evaluation 443 (EdwardElgar Publishing Limited 2004).

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On the above point, Nobel Laureate ProfessorJoseph Stiglitz and Professor Steven Salop demon-strated through what they termed the "Bargains andRipoffs" model that, in the context of asymmetricinformation, markets may become characterized byrecurring, economically inefficient price increases.See Joseph Stiglitz & Steven Salop, Bargains andRipoffs: A Model of Monopolistically CompetitivePrice Dispersion, 44 Rev. Econ. Studies 493 (1977). Asimilar result was demonstrated in a 1979 article inthe Quarterly Journal of Economics by ProfessorsDennis Smallwood and John Conlisk. The authorsshowed how consumer uncertainty regarding productquality would lead to market outcomes where "con-sumers pay considerably for being uninformed."Dennis E. Smallwood & John Conlisk, Product Qual-ity In Markets Where Consumers Are ImperfectlyInformed, 93 Q.J. Econ. 18 (1979).

The pharmaceutical industry is certainly vulnera-ble to these price distortions resulting from informa-tion asymmetry, but, in the context of the prescriptiondrug market, it is often the third-party payors thatend up bearing the cost. Physicians are insulatedfrom the process of paying for the medications theyprescribe. Additionally, patients--who typically fol-low the guidance of their physicians--may pay littleor nothing for their prescriptions. With such limited"stakes" in the pricing of pharmaceuticals, consum-ers (patients) and doctors would suffer--at most--little damage from artificial price increases due tofraudulent activity (even if patients would sufferfrom ineffective pharmaceuticals).

Third-party payors represent a very different posi-tion in the pharmaceutical market than patients andphysicians. First, they often have little influence in

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choosing prescription drugs for usage by their policy-holders. Second, they typically pay for the pharma-ceuticals that are purchased. As such, they bear therisk of additional/higher costs if fraudulent market-ing causes a drug’s volume or unit price to rise artifi-cially. Third, they target their own revenue stream(insurance premiums) based upon factual data andprojections that assume non-fraudulent marketing.Given the unusual separation between prescription,usage, and payment in the pharmaceutical industryand the pervasive asymmetric information in theindustry, without adequate legal safeguards phar-maceutical companies will have strong incentive touse fraudulent marketing to take advantage of con-sumers and third-party payors.

Empirical medical and economic literature con-firms that there are strong incentives for drug com-panies to use fraudulent marketing to the detrimentof consumers and third-party payors. A study byDoctors Mary-Margaret Chren and Seth Landefeld inthe Journal of the American Medical Society showedthat drug companies’ marketing overtures had strongeffects on physician behavior. Specifically, the authorsaver that their results demonstrate that "[r]equestsby physicians that drugs be added to a hospital for-mulary were strongly and specifically associated withphysician’s interactions with the companies manu-facturing the drugs." Mary-Margaret Chren & SethLandefeld, Physicians’ Behavior and their Interac-tions with Drug Companies, 271 JAMA 684 (1994).Furthermore, the authors found that more than halfof the drugs requested provided "little or no advan-tage" over drugs already on the formulary. Id. Ofcourse, this result is not surprising considering theenormous amount of money that pharmaceutical

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companies spend on advertising and marketing.There can be little doubt that marketing is an ex-tremely powerful tool that pharmaceutical companiescan use to increase demand for their products,s

Not only can pharmaceutical companies usemarketing as a tool to strengthen demand, but theacademic literature also indicates that such market-ing allows drug companies to raise their prices. In astudy published in the Journal of Law and Econom-ics, Professor John Rizzo of Stony Brook Universityfound that "product promotion inhibits price competi-tion in the pharmaceutical industry, lowering priceelasticities and leading to higher equilibrium prices."John Rizzo, Advertising and Competition in theEthical Pharmaceutical Industry: The Case of Anti-hypertensive Drugs, 42 J.L. Econ. 89, 112-113 (1999).More recently, two economists affiliated with theNational Bureau of Economic Research, Dhaval Daveand Henry Saffer, studied the effects of direct-to-consumer advertising of prescription drugs and foundthat direct-to-consumer advertising is associatedwith both increased sales and higher prices. Theyestimate that as much as 19 percent of the recentincreases in drug expenditures can be attributed tothe growth of direct-to-consumer advertising. SeeDhaval Dave & Henry Saffer, The Impact of Direct-to-Consumer Advertising on Pharmaceutical Pricesand Demand, NBER Working Paper No. 15969 (2010).

In addition to fraudulent marketing being a devicefor raising pharmaceutical prices by lowering elastic-ity of demand, fraudulent marketing may be used by

8 This particular example of marketing is not fraudulent, perse. However, it further demonstrates how pharmaceutical com-panies can exercise power through marketing.

15

pharmaceutical companies, as it was in the case ofZyprexa, to justify a premium (monopoly) price for adrug where the drug’s relative efficacy would notdemand such a premium to competing treatments.While such instances may not increase the overall(unit) purchases of pharmaceuticals, it will increasethe total cost of those treatments. It is well-recognized in the economic literature that drugsthat represent significant therapeutic advances overexisting treatments command premium prices. Forinstance, in an article summarizing the state ofeconomic knowledge about drug prices and demand,Professor Ernst Berndt of the Massachusetts Insti-tute of Technology wrote, "For the United States,which accounts for not quite half of global brandedprescription drug sales, empirical evidence is consis-tent with the notion that manufacturers price basedprimarily on marginal value," the perception of whichis increased through advertising. Ernst R. Berndt,Pharmaceuticals in U.S. Health Care: Determinantsof Quantity and Price, 16 J. Econ. Persp. 45, 59(2002). In a statistical analysis published in theReview of Economics and Statistics, Professor WilliamComanor and Dr. Z. John Lu quantified the value todrug companies of introducing a drug with signifi-cant therapeutic advantages over existing treat-ments. The authors explained, "This paper providesempirical evidence on the leading factors affectingthe prices of new pharmaceuticals, both at introduc-tion and after 4, 6, and 8 years. Most important isthe extent of the therapeutic advance embodied in anew product. For drugs which represent importanttherapeutic gains, launch prices can be two or threetimes those of existing drugs used for the same pur-poses." William S. Comanor & Z. John Lu, StrategicPricing of New Pharmaceuticals, 80 Rev. Econ. Stat.

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108 (1998). Thus, the potential gains from fraudu-lent marketing create strong incentives for corporatemalfeasance absent strong legal institutions for dis-couraging such behavior.

In the current matter, the specific quantificationof the artificial fraudulent increases to the price ofZyprexa proved to represent more than a trivialamount. The U.S. government--handling less than30 percent of the prescription drug market--recovered damages of approximately $800 million ina total settlement of $1.4 billion.~ With third-partypayors representing a larger share of the prescriptiondrug market (see Figure 3), the damage inflicted ontheir payments would also be expected to be signifi-cant.

Allowing third-party payors to sue drug companiesfor fraudulent marketing not only helps to compen-sate them for the overcharges suffered as a result ofthe fraud, but is an essential tool for discouragingdrug companies from engaging in fraudulent market-ing. See William Landes & Richard Posner, A Posi-tive Economic Analysis of Products Liability, 14 J.Legal Stud. 535 (1985); William Landes & RichardPosner, Tort Law as a Regulatory Regime for Cata-strophic Personal Injuries, 13 J. Legal Stud. 417(1984); Steven Shavell, A Model of the Optimal Use ofLiability and Safety Regulation, 15 RAND J. Econ.271 (1984). Furthermore, by discouraging fraudulentmarketing, the threat of litigation from third-party

9 See U.S. Dep’t of Justice, Press Release, Eli Lilly and

Company Agrees to Pay $1.415 Billion to Resolve Allegationsof Off-Label Promotion of Zyprexa (Apr. 18, 2011), availableat http://www.justice.gov/opa/pr/2009/January/O9-civ-O38.html;Janet Lundy, Prescription Drug Trends, The Henry J. KaiserFamily Foundation 2 (2010).

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payors will likely increase the pharmaceutical indus-try’s investment in socially beneficial advertisingthat provides accurate information to consumers anddoctors.

III. SIZE OF ECONOMIC IMPLICATIONS

The discussion above revealed how fraudulentactivity for a single pharmaceutical caused pricedistortions of approximately $800 million over lessthan 30 percent of that market. Zyprexa, however,represents only a small part of the prescription drugindustry, which reported sales of over $1 trillion from2001 to 2005. See Figure 4. Thus, the potentiallosses to the U.S. Government/third-party payors--and gains to the pharmaceutical companies--couldeasily reach tens of billions of dollars annually.

IV. SUMMARYThe structure of the pharmaceutical industry

uniquely features the party paying for product asbeing different from the party targeted by market-ing (fraudulent or otherwise). In this way, price in-creases resulting from fraudulent marketing typicallydo not harm physicians or patients, but ratherthird-party payors. While Governmental third-partypayors have been allowed to recover hundreds of mil-lions of dollars in damages resulting from fraudulentadvertising, the Second Circuit has prevented privatethird-party payors from demanding such redress.Without such accountability, pharmaceutical com-panies will have a significant economic incentive topursue fraudulent marketing. A reversal of theSecond Circuit’s decision would restore an equilibriumto this market in which fraudulent marketing wouldrun the risk of liability to both Governmental andprivate third-party payors.

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The petitiongranted.

CONCLUSION

for a writ of certiorari should be

Respectfully submitted,

DAVID L. BROWNECounsel of Record

THE LAW OFFICES OFDAVID L. BROWNE, L.L.C.

One Canal PlaceSuite 1000365 Canal StreetNew Orleans, LA 70130(504) 648-0181(dbrowne@brownelaw.com)

April 25, 2011