Here is the executive summary of the documents to be discussed in Executive Session by the Brattleboro Selectboard:
Vermont Local Government Clients
Sanford Heisler Sharp, LLP The Cicala Law Firm PLLC
December 15, 2021
Nationwide Settlements with Three Large Distributors and Janssen
1. Settlement Approval Deadline: January 2, 2022
2. Recommendation: Approve Settlements
3. Total Funds to Vermont: Approximately $65 Million (assuming full participation)
4. Local Government Allocations: 15% of total Vermont share, to be allocated pursuant to Exhibit G to the Settlement Agreements.
As you know, on or about July 21, 2021, the three largest pharmaceutical distributors, McKesson Corp., Cardinal Health and AmerisourceBergen (“Distributors”), and manufacturer Janssen Pharmaceuticals, Inc. and its parent company Johnson & Johnson (“Janssen”)1 have reached agreement on global settlements that promise to provide up to $26 billion in value nationwide. 2 Approximately $23 billion of that potential value will be available to state and local governments as compensation and for abatement of the harms caused by the opioid epidemic. Additionally, the settlements will offer injunctive relief that will compel the settling defendants to change their business practices in meaningful ways.
1 As you may recall, the Distributors were responsible for safely and prudently managing the distribution of opioids from the point of production to the point of sale or dispensation. Their alleged liability is based on their failure to properly track opioid shipments, their failure to prevent diversion of opioids to the black market, and their failure to stop and report suspicious orders for opioids. Janssen was a manufacturer of opioids and opioid ingredients, and its liability is based on its misrepresentations about the safety and efficacy of opioids as well as its other actions to inappropriately increase the market for opioids.
2 These agreements are available for viewing at www.nationalopioidsettlement.com.
The settlements hinge on participation by governmental entities in three ways:
1) By making up to approximately $10 billion of the potential payments to states and localities contingent on the attainment of specified rates of participation by states and political subdivisions within states;
2) By establishing a tiered system that will reward all settlement participants for widespread participation in the settlements and low rates of future opioid litigation against the Distributors and Janssen; and
3) By providing opportunities for the settling defendants to abandon the settlements in its nascent stages if sufficient participation is not achieved.
Under the terms of the settlement agreements, local governments have until January 2, 2022 to determine whether they wish to participate in the settlements.
We recommend that you elect to participate in the settlements, and that your governing bodies take the necessary action to approve the settlements at meetings in the next two weeks. The settlements are the result of years of hard-fought litigation and negotiations, and, if adopted, they will provide significant and much needed resources to Vermont with which to battle this emergency epidemic. Moreover, this funding will begin to be available almost immediately, versus what would undoubtedly be many more years of litigation before a Vermont trial against these defendants, whose future economic prospects, if settlements are not achieved, would be uncertain in the face of such huge, nationwide litigation exposure.
The settlement terms are complex, and the detailed sections below delve into the complexities, but the most salient terms are as follows:
- The Distributors will pay a maximum amount of $21 billion over 18 years. The payments will be made in annual installments of up to approximately $1.26 billion over the first ten payment years and up to $1.03 billion over the last eight payment years.
- Janssen will pay a maximum amount of $5 billion over no more than 9 years. If certain participation incentives are achieved within states, $3.7 billion of that amount, including approximately $8.8 million to Vermont, will be paid by July 2022.
- Approximately $22.8 billion of that total maximum amount will be available for states and their political subdivisions as resolution of their claims and potential claims against the Distributors and Janssen.
- Of that $22.8 billion, approximately $12.2 billion of the total amount will be available as base, fixed payments to those who participate in the settlements, and approximately $10.6 billion of the total amount will be available as incentive payments that will reward high participation rates by political subdivisions within the state.
- Each state’s share of the total value of the settlements – both base payments and incentive payments – will be calculated as a percentage of the national total pursuant to a schedule of allocation percentages agreed to by state attorneys general. Vermont’s share is 0.2844241374%. An individual state’s share of the total value of the settlements will not increase or decrease because one or more other states do not participate in the settlement. Therefore, Vermont’s ability to maximize its recovery under the settlements is dependent upon participation rates of Vermont political subdivisions, not the participation rates in other states.
- The remaining approximately $3 billion of settlement value will be set aside to fund a) credits toward potential settlements with Native American tribes and certain public entities that are uniquely situated, b) restitution and reimbursement for litigation costs and expenses incurred by state attorneys general and private attorneys, and c) a private attorneys’ fee fund, which will reduce the use of settlement proceeds to satisfy obligations under contingent fee contracts for fees.3
- The Distributors made a payment of approximately $1.26 billion into an escrow account this in September 2021 and both Distributors and Janssen will make initial annual payments by July of 2022. Money from the settlements could begin to flow to cities and counties in Vermont as early as April 2022, but the exact timing will depend on when certain milestones are achieved.
- If political subdivisions participate in sufficient number, Vermont’s share of the Distributor and Janssen settlements will be approximately $65 million.
- Participation in the settlements will require a release of claims, and maximization of the value of the settlements in Vermont will require releases by litigating towns and a handful of certain other cities and towns that have relatively large populations.
3 As noted on our call, Sanford Heisler Sharp and Cicala Law Firm will not, in relation to the settlement agreements with the Distributors and Janssen, seek to recover from our Vermont clients any difference between the amount we would be entitled to recover pursuant to our contingent fee contracts and the amount we are able to recover from the national attorneys’ fee fund as compensation for our representation of our Vermont clients. We reserve the right to enforce our contingent fee agreements in any future settlements with any other defendant, should those settlements occur under different circumstances in Vermont.
Below is a more detailed explanation of the settlement agreements that includes the following: explanation of the timing and process of settlement milestones and payments; explanation of the payment amounts and the incentive payment structure; explanation of the tier structure of the settlements and its potential effects on settlement values; and explanation of the injunctive relief included in the settlements.
Timing and Process of Settlement Milestones and Payments
Three milestones must be achieved before the settlement agreements become effective and settlement funds start flowing. The first milestone required a determination by the Distributors and Janssen that sufficient state attorneys general were committed to participating. This has already occurred.
The remaining two milestones are:
(1) Litigating and non-litigating political subdivisions within states have until January 2, 2022 to determine if they wish to participate in the settlements, and the Distributors and Janssen must then decide within 30 days if the number of participating political subdivisions is sufficient for them to declare the settlement final and effective; and
(2) Assuming that the settling defendants declare the settlement final and effective, states will have 60 days to seek the entry of consent judgments that will put into effect the terms of the settlements.
We are currently in the 120-day period during which political subdivisions within settling states must decide whether they wish to participate. Political subdivisions that decide to participate in the settlements after January 2, 2022 may do so, but they will likely receive reduced payments.
In order to participate in the settlements, political subdivisions must take certain logistical steps, and dismiss their claims against the Distributors and Janssen. Again, we urge you to ensure that your governing body takes action to approve release of its claims against the Distributors and Janssen.
Once the January 2, 2022 deadline passes, the settling defendants will have 30 days to assess whether, in their discretion, sufficient critical mass has been achieved. If the Distributors and Janssen elect to proceed with the settlement, a 60-day period for entry of consent judgments will be triggered. After entry of consent judgments, settlement payments will begin to flow.
The specific timing of settlement payments is as follows. In September 2021, the Distributors made the first of their yearly payments, and that payment will be held in escrow if and until the Distributor settlement is declared final and put into effect. The Distributors will make their second annual payment by July 15, 2022. By July 2022, Janssen will make its first- and second-year payments, and, if certain participation incentives described below are achieved, Janssen will accelerate their first five scheduled payments to July 2022. Annual payments will thereafter be due each July for both the Distributors and Janssen. The specific amount of the potential payments is roughly, though not exactly, the same in each payment year.
Payment Amounts and Incentive Payment Structure
As noted above, up to approximately $12.2 billion, or 55% of the potential value of the settlements, will be available as base payments that will be paid in fixed amounts regardless of participation rates of political subdivisions, but subject to potential suspensions and offsets described below. Another approximately $10.6 billion, or 45% of the potential value of the settlements, will be available as incentive payments that can be realized by achieving certain levels of participation among political subdivisions within settling states.
There are four different incentive payments that are referred to as Incentives A through D in the settlement agreements. The incentive payment that a state is eligible for in a given payment year is recalibrated each year, except that during the first two payment years, all participating states are guaranteed Incentive A payment.
The incentive payment structure is designed to encourage participation by political subdivisions within states: the more subdivisions within a state that provide releases, the greater the recovery for all participating entities within the state.
Incentive A constitutes 40% of a state’s potential total settlement share, and it is realized by obtaining a) releases from all litigating political subdivisions, all non-litigating political subdivisions with populations above 10,000, and a limited number of certain other political subdivisions (e.g., hospital districts) meeting certain size characteristics; b) a legislative or other form of bar on future litigation; or c) a combination of (a) and (b), for example, by obtaining releases from all litigating entities and a bar on newly filed litigation. Any state that realizes Incentive A will also benefit from highly accelerated payment of Janssen’s first five scheduled payments, which equal 74% of its total potential payments. In Vermont’s case, that would mean that the State would receive approximately $8.8 million from Janssen by July 2022 (in addition to scheduled payments owed by the Distributors) if it realizes Incentive A.
Incentive B is an alternative to Incentive A and is not applicable if a state qualifies for Incentive A. Incentive B constitutes up to 25% of a state’s potential total settlement share. Incentive B is realized by obtaining releases from litigating political subdivisions only, and it can be realized on a sliding scale, depending on the number of litigating political subdivisions that provide releases. If 100% of litigating political subdivisions provide releases, 100% of Incentive B is realized. If 99% of litigating political subdivisions provide releases, 95% of Incentive B is realized. If 95% to 99% of litigating political subdivisions provide releases, 60% of Incentive B is realized. The percentage of Incentive B that is realized decreases further as the percentage of litigating political subdivisions that provide releases decreases.
Incentive C is also an alternative to Incentive A and is also not applicable if a state qualifies for Incentive A. Incentive C constitutes up to 15% of a state’s potential total settlement share. It is realized by obtaining releases from litigating political subdivisions and from non-litigating political subdivisions with populations of 30,000 or more. Like Incentive B, Incentive C is realized on a sliding scale, with 100% of Incentive C realized where 100% of litigating political subdivisions and non-litigating political subdivisions with populations of 30,000 or more provide releases. The amount of the incentive that is realized decreases as the percentage of relevant political subdivisions that provide releases decreases.
Incentive D constitutes 5% of a state’s potential total settlement share, and it is realized in payment years 6 through 18 where there are no later-filed lawsuits by non-participating political subdivisions, if any, within a participating state.
Participation Tiers and Payment Suspensions and Reductions
In addition to the Incentive payment structure, the Distributor and Janssen settlement agreements contain further mechanisms for encouraging widespread participation in the settlements in the form of payment suspensions or offsets. Potential suspensions of payments or offsets to payments apply if one or more political subdivisions do not participate in the settlement and then file opioid-related litigation against the settling defendants.
In theory, these potential suspensions and offsets can be material, as much as 66% of a state’s overall settlement payment. However, the risk of a material suspension or offset is very low. First, any suspensions and offsets can be totally avoided where a state qualifies for Incentive A, which is achieved when a state has universal participation in the Settlements by the categories of political subdivisions mentioned above.
Second, the Agreements contain certain threshold limits and related devices that would reduce the impact of any suspension or offset, even if Vermont does not qualify for Incentive A. For example, the suspension and offset structure does not apply where the late-filed litigation claims less than $10 million, or is subsequently valued at less than $10 million, and also contains limitations where the population of the late-filing entity is less than 10,000. Furthermore, for the payment suspension and offset structure to apply, any late-filed litigation must survive certain milestones that are dependent on the participation tier that is applicable in a given year. Assuming that participation tier one (the lowest tier and the harshest towards participating states) is applicable in a given year, any late-filed litigation must either survive a preliminary motion to dismiss or demurrer and/or still be active and viable one year after filing in order to trigger the suspension and offset structure
In sum, because we believe that widespread participation by relevant Vermont political subdivisions can be achieved, and because there would be significant hurdles to clear before any suspension or offset would be applied, we believe that the risks associated with potential suspensions or offsets is small, albeit theoretically possible.
In addition to the monetary relief described in this memorandum, the settlements also provide for very important injunctive relief that will force the Distributors and Janssen to change the way they do business. This injunctive relief includes provisions that will require the Distributors to not only properly track and account for their own opioid shipments but also to track and account for the opioid shipments of other distributors, in order to detect, stop, and report suspicious orders of opioids. Furthermore, Janssen will not market or sell any opioids or active opioid ingredients in the next ten years and will not be permitted to engage in lobbying activities related to opioids for ten years. Janssen will also make the clinical trial data for its opioids available for unbiased medical research.
The highly complex Distributor and Janssen settlement agreements are the product of years of hard-fought litigation and complicated negotiation. They provide significant sums to state and local governments to help recover from the past harm they have suffered as a result of the opioid epidemic and to help fight the ongoing harms the epidemic continues to inflict on public entities. They also provide important injunctive relief that will force the settling defendants to change the way they do business. We recommend that your government bodies accept the terms of these agreements and participate in both settlements.
The documents go on to recommend that the Town engage the law firm to file a federal lawsuit:
“As we have done for the Town of Bennington, our firms are prepared to file a federal lawsuit on behalf of the Town of Brattleboro against the four defendant groups responsible for the epidemic: opioid manufacturers, distributors, retail pharamcies and PBMs. A copy of our Bennington pleading is included for your information.”
And they only want 25%…
“Our firms are prepared to do the work described for a 25% contingency fee. We are prepared to advance all costs of the litigation, to be recovered only from any judgment or settlement.”