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HomeMy WebLinkAboutAgenda - 01-23-2018 4-b - Presentation on Opioids and Legal IssuesORANGE COUNTY BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: January 23, 2018 SUBJECT: Presentation on ODioids and L DEPARTMENT: Board of Commissioners ATTACHMENT(S): 1) North Carolina County Opioid Litigation Overview Memorandum 2) Summary of Claims Against Opioid Distributors and Manufacturers 3) Edison Hill and Michael Fuller Biographical Information Action Agenda Item No. 4 -b IIssues INFORMATION CONTACT: Donna Baker, 919 - 245 -2130 1 PURPOSE: To receive a presentation from attorneys representing some North Carolina local governments and some local governments across the country regarding litigation against opioid manufacturers and distributors. BACKGROUND: There is a significant amount of information being disseminated to county commissioners, managers, and attorneys on the topic of opioid litigation. The North Carolina Association of County Commissioners ( NCACC) Board of Directors was briefed on this issue and had a robust discussion on the importance of ensuring that county interests are protected in any litigation or potential settlements related to the opioid epidemic. As a result of that discussion, the NCACC organized a November 15, 2017 forum to ensure that county attorneys had access to information on the topic. Attorneys representing some North Carolina local governments and other local governments across the United States will make a presentation on the litigation against opioid manufacturers and distributors. FINANCIAL IMPACT: There is no financial impact associated with receiving the presentation. SOCIAL JUSTICE IMPACT: There are no Orange County Social Justice Goals associating with receiving the presentation. RECOMMENDATION(S): The Manager recommends that the Board receive the presentation and provide direction to staff. �i Baron & Budd, P.C. Greene, Ketchum, Farrell, Bailey & Tweel, LLP Hill, Peterson, Carper, Bee & Deitzler, PLLC Levin, Paparrtorzio, Thomas, Mitchell, Rafferty & Proctor, P.A. McHugh Fuller Law Group 3 TABLE OF CONTENTS Overview Memorandum .......................... ..............................1 Sample of Key Documents Memo of Agreement — DEA v. McKesson ...................... 15 Memo of Agreement — DEA v. Cardinal Health ............. 29 Relevant Federal Statutes ................... .............................37 HDMA Industry Compliance Guidelines ........................40 2006 Rannazzisi Letter ..................... ............................... 55 2007 Rannazzisi Letter ..................... ............................... 59 Litigation Team Counsel in Consortium Baron& Budd ................................... ............................... 63 Levin Papantonio Thomas Mitchell Rafferty Proctor ............................ ............................... 67 Greene, Ketchum, Farrell, Bailey & Tweel ..................... 70 Hill, Peterson, Carper, Bee & Deitzler ............................ 71 McHughFuller .................................. ............................... 72 North Carolina County Opioid Litigation - Privileged and Confidential C! Overview Memorandum Prospective North Carolina County Opioid Litigation North Carolina is in the midst of a public health crisis stemming from the flood of opioids pouring into the State, as well as North Carolina's Cities and Counties. The opioid epidemic has been fueled by the greed of the corporate elite, such as Fortune 500 behemoth McKesson Corp., deliberately failing to detect and report "suspicious" orders of opioids, despite being required to do so by federal and state law. In 2017, McKesson, the largest drug distributor in the nation, was fined a record $150 million by the federal government for its blatant failure to report suspicious orders in violation of federal law. Cardinal Health, another member of the "Big Three" drug distributors, was fined $44 million for its failure to report suspicious narcotic orders to the DEA. Substantially all prescribed opioids must flow through the distributors: federal law requires that opioids be distributed through a closed system. Accordingly, the distributors are legally required to spot and report red flags in the distribution chain. McKesson, Cardinal, and their fellow distributors admit that they are the gatekeepers — the watch dogs — for preventing opioid abuse, stating in their self - created Industry Compliance Guidelines: "distributors are uniquely situated to perform due diligence in order to help support the security of the controlled substances... and reduce the possibility that controlled substances within the supply chain will reach locations they are not intended to reach."� Unfortunately, the distributors wholly ignored their admitted legal obligations. Instead of putting in controls to stop opioid abuse and alerting authorities to suspicious orders, the ' See Healthcare Distribution Management Association (HDMA) Industry Compliance Guidelines: Reporting Suspicious Orders and Preventing Diversion of Controlled Substances ( "industry Compliance Guidelines" or "Guidelines "). North Carolina County Opioid Litigation - Privileged and Confidential 5 distributors instead have chosen to abuse their privileged position, lining their pockets by shipping massive quantities of drugs to pharmacies and dispensaries without performing any checks — with devastating consequences to North Carolina and its citizens. No action has yet been filed on behalf of North Carolina Counties against the opioid distributors. North Carolina law affords the Counties of North Carolina the means to hold these distributors accountable for their actions and to stop the influx of these powerful drugs. North Carolina law require distributors to comply with State and Federal law, which included identifying, investigating, and reporting suspicious orders of controlled substances. The distributors' known violations of these laws give North Carolina Counties strong claims for significant monetary relief. Distributors of opioid medications are vulnerable to damage claims and penalty actions under theories such as public nuisance and negligence. Potentially recoverable damages include (1) money wrongfully paid for opioids through government -payor programs including employee insurance; (2) costs for providing medical care, additional therapeutic, and prescription drug purchases, and other treatments for patients suffering from opioid - related addiction or disease, including overdoses and deaths; (3) costs for providing treatment, counseling, rehabilitation services; (4) costs for providing treatment of infants born with opioid - related medical conditions; (5) costs for providing welfare or protective services for children whose parents suffer from opioid - related disability or incapacitation; and (6) costs directly associated with law enforcement and public safety relating to the opioid epidemic. Local and state governments may also be entitled to injunctive relief to prevent further unlawful distribution of these drugs. North Carolina County Opioid Litigation - Privileged and Confidential 2 l �. Herein, we identify causes of action available under North Carolina jurisprudence that would allow the Counties of North Carolina to hold responsible the distributors which have fueled the opioid epidemic within North Carolina. I. Wholesale Distributors Are Required under Federal and North Carolina and Federal Law to Monitor for and Report Suspicious Orders of Opioids. A. The Role of Wholesale Distributors in the Opioid Distribution Chain. Pharmaceutical distributors are supposed to play the role of "beat cops" in preventing the flow of controlled substances to abusers. Congress enacted the Controlled Substances Act ( "CSA ") in 1970 with the express purpose of creating a "closed system" for the distribution of controlled substances designed to prevent the diversion of legally produced controlled substances into illicit markets.2 Through the CSA, Congress stripped the manufacturers of the ability to sell directly to retailers, intentionally creating a link in the chain of distribution between Big Pharma and the pharmacies. This link is the wholesale distributor. There are only 800 registered wholesale distributors in the United States. Three Fortune 500 companies own 85% of the market share: Cardinal Health, AmerisourceBergen, and McKesson Corporation. Each company generates over $100 billion in revenue annually. Because the CSA creates a "closed system" in which opioid dispensers — like pharmacies — must obtain opioids from opioid distributors, these distributors are "uniquely situated" to spot red flags in the opioid chain, as they note in their own industry guidelines. The distributors are the first line of defense against the diversion of these drugs that can lead to abuse, addiction, and blight. 2 See 21 U.S.C.A. §§ 801 -971 (2006); 21 U.S.C.A. §§ 1300 -1321 (2009); H.R. Rep. No. 91- 1444; 1970 U.S.C.C.A.N. 4566, 4572 (Sept. 10, 1970). North Carolina County Opioid Litigation - Privileged and Confidential 3 N The closed chain of distribution under the CSA is designed to ensure that all controlled substances are accounted for as they make their way from the manufacturer to the end user. As would be expected, all who encounter controlled substances within the distribution chain are required to keep meticulous records. For example, pursuant to 21 C.F.R. § 1305.13(d) distributors of controlled substances must forward a copy of every order filled to the DEA. B. Wholesale Distributors Are Required to Monitor for and Report Suspicious Orders of Opioids under North Carolina Law. To further combat diversion of controlled substances, the distributors are legally required under federal law to be on alert for suspicious controlled substance orders by pharmacies — such as orders of unusual size, frequency, or pattern — and to report these unusual orders to the relevant authorities so that they can be investigated. Federal law charges registered wholesale distributors with the non - delegable duty to "design and operate a system to disclose ... suspicious orders of controlled substances. The registrant [distributor] shall inform the Field Division Office of the Administration in his area of suspicious orders when discovered by the registrant. Suspicious orders include orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency." 21 C.F.R. § 1301.74(b). North Carolina law requires wholesale drug distributors to comply with State and Federal law. N.C. Gen. Stat. Ann. § 106 - 145.10. By distributing opioids while failing to monitor for and report suspicious orders, wholesale distributors violated both North Carolina state law and federal law. C. Wholesale Distributors Have Been Warned of and Have Admitted Their Obligations. The distributors have been on specific notice of their duties with regard to suspicious orders since at least September 2006, when the DEA sent distributors letters referencing the North Carolina County Opioid Litigation - Privileged and Confidential 4 federal CSA monitoring and reporting requirements and providing guidance on what may constitute a "suspicious order." These letters identified diversion and abuse of controlled prescription drugs as a "serious and growing health problem," commanded that "distributors must be vigilant" in determining who can be trusted to receive controlled substances, reminded distributors of their obligation to identify and report suspicious orders, and provided guidance on what circumstances may be indicative of diversion. The wholesale distributors have readily admitted their monitoring and reporting obligations. The major pharmaceutical distributors (the potential defendants here) are members of the Healthcare Distribution Alliance ( "HDA ") (known until mid -2016 as the Healthcare Distribution Management Association, or "HDMA "), a trade association that represents pharmaceutical distributors throughout the Americas. Such members include, for example, McKesson, AmerisourceBergen and Cardinal Health, the heads of which also sit on the HDA executive committee and board. This membership is significant because, in response to DEA requirements that distributors investigate and report any suspicious controlled substance orders, HDA created "Industry Compliance Guidelines" for pharmaceutical distributors. These Guidelines, which were developed with the "strong endorsement and expertise of [HDA] members" not only function as admissions of the member distributors' duties, but also serve to set out the industry standards to which these distributors may be held. The distributors created these Guidelines "in recognition of a growing problem of misuse and diversion of controlled substances," so that the distributors could "further scrutinize purchase orders for these products," as they were required to do by law. As noted above, the North Carolina County Opioid Litigation - Privileged and Confidential 5 9 distributors admit that they "are uniquely situated to perform duee diligence in order to help support the security" of controlled substance distribution.3 The Guidelines set out "Know Your Customer Due Diligence" standards with respect to all distributor customers — which, in the context of the Guidelines, comprises pharmacies and other legal dispensaries. These due diligence standards include gathering detailed information on the customer base of a pharmacy, the quantity of prescriptions filled each day, the quantity of controlled substance prescriptions filled each day, and the percentage of controlled substance purchases compared to overall purchases, and then utilizing this information to compare orders to a "threshold" profile to identify orders of unusual size, frequency or pattern. When confronted with "unusual" orders, the distributors' own Guidelines dictate that they should stop the shipments, investigate the orders under steps that are listed in the Guidelines, and report the suspicious activity to the DEA. These industry standards clearly establish that the duty of care for pharmaceutical distributors includes identifying, investigating, and reporting suspicious orders of controlled substances. Distributors have chosen to abandon their duties, thereby enabling the diversion of opioids and helping to create the present epidemic. The distributors have not performed adequate due diligence and have failed to report suspicious orders, breaching the very industry standards they, themselves, created. In doing so, the distributors have violated their duties of care and both federal and North Carolina state law. D. "ARCOS" Data Contains Key Evidence of the Distributors' Breaches. One of the ways wholesale distributors are to maintain controls against the diversion of prescription opiates is by inputting all distributions in the DEA Automation of Reports and 3 See HDMA Industry Compliance Guidelines. North Carolina County Opioid Litigation - Privileged and Confidential 6 ri[t; Consolidated Orders System ( ARCOS) database.4 This database contains monthly reports from each wholesale distributor and documents the number of doses of each controlled substance sold to every pharmacy on a monthly basis. The wholesale distributors were required to monitor this data for suspicious orders. When "suspicious orders" were identified based on this regularly reported data, the wholesale distributors were required to halt shipment, perform an on -site investigation, determine whether a risk of diversion is present, and, if so, report directly to the relevant authorities, including the DEA. "Suspicious orders" are defined by guidance letters provided by the DEA as well as corporate policies and industrial practices, and federal law, which further define the term. For instance, any pharmacy order which exceeds 10% of the prior month's order would be considered a "suspicious order." 5 The information in the ARCOS database is confidential. The public has never seen the data related to the volume of prescription opiates distributed in each community. That changed when a journalist from the Charleston Gazette gained access to records sealed in a lawsuit filed by the West Virginia Attorney General against the wholesale distributors. The data revealed that 780 million prescription opiates were distributed in West Virginia (population 1.8 million) during a six -year window of time. The journalist, Eric Eyre, recently won the Pulitzer Prize for his investigative journalism. North Carolina's governmental entities have the ability through local law enforcement and cooperation with the DEA to seek and obtain historical ARCOS data. Because this 4 See United States v. Four Hundred Sixty Three Thousand Four Hundred Ninety Seven Dollars & Seventy Two Cents ($463,497.72) in U.S. Currency From Best Bank Account, 779 F. Supp. 2d 696, 709 (E.D. Mich. 2011). 5 See Southwood Pharmaceuticals, Inc., 72 FR 36487 (2007); Cardinal Health, Inc. v. Holder, 846 F. Supp. 2d 203 (D.D.C. 2012). North Carolina County Opioid Litigation - Privileged and Confidential 7 11 information contains a record of every order filled by each pharmaceutical distributor, a review of those orders would allow for a determination of how many suspicious orders were not flagged by the distributors. This lack of real -time monitoring and reporting by the distributors stripped the DEA of their ability to timely identify, investigate, and prevent the diversion of the highly addictive drugs at issue. Il. North Carolina Counties Have Standing to Hold Wholesale Opioid Distributors Accountable for Unlawful Distribution. A. Nuisance Actions. 1. North Carolina Nuisance Law Specifically Imbues the Counties of North Carolina with Authority to Bring Claims. The Counties of North Carolina are granted statutory authority to maintain a nuisance action for unlawful distribution of prescription drugs. Specifically: Wherever a nuisance is kept, maintained, or exists, as defined in this Article, the Attorney General, district attorney, county, municipality, or any private citizen of the county may maintain a civil action in the name of the State of North Carolina to abate a nuisance under this Chapter, perpetually to enjoin all persons from maintaining the same, and to enjoin the use of any structure or thing adjudged to be a nuisance under this Chapter; provided, however, that no private citizen may maintain such action where the alleged nuisance involves the illegal possession or sale of obscene or lewd matter. N.C. Gen. Stat. Ann. § 19 -2.1. These provisions grant the North Carolina Counties standing to pursue a public nuisance action against wholesale drug distributors for violations of state and federal laws and regulations. 2. The Distribution of Opioids in Violation of North Carolina Laws Constitutes a Public Nuisance. The unlawful distribution of opioids in violation of state and federal laws constitutes a nuisance under North Carolina law. North Carolina County Opioid Litigation - Privileged and Confidential 8 12 Under North Carolina law: (a) The erection, establishment, continuance, maintenance, use, ownership or leasing of any building or place for the purpose of [ ... ] illegal possession or sale of controlled substances as defined in the North Carolina Controlled Substances Act, [...]. The activity sought to be abated need not be the sole purpose of the building or place in order for it to constitute a nuisance under this Chapter. (b) The erection, establishment, continuance, maintenance, use, ownership or leasing of any building or place wherein or whereon are carried on, conducted, or permitted repeated acts which create and constitute a breach of the peace shall constitute a nuisance. N.C. Gen. Stat. Ann. § 19 -1. "Breach of the peace" is defined as "repeated acts that disturb the public order including, but not limited to, homicide, assault, affray, communicating threats, unlawful possession of dangerous or deadly weapons, and discharging firearms." N.C. Gen. Stat. Ann. § 19 -1.1. The statutory definition of "breach of the peace" includes crimes other than those listed. The North Carolina Court of Appeals has stated that "[a]lthough the definition is not confined to these examples, each individual example is a crime. Therefore, in order to determine if a breach of the peace has occurred, the nature of the incident will be determinative." State ex rel. City of Salisbury v. Campbell, 169 N.C. App. 829, 833, 610 S.E.2d 799, 801 (2005). North Carolina statutes further provide as follows: A wholesale drug distributor shall comply with applicable federal, State, and local laws and regulations. A wholesale distributor that deals in controlled substances shall register with the federal Drug Enforcement Administration (DEA) and shall comply with all applicable federal, State, and local laws and regulations. A wholesale drug distributor is subject to any applicable federal, State, or local laws or regulations that relate to prescription drug salvaging or reprocessing. N.C. Gen. Stat. Ann. § 106 - 145.10. At common law in North Carolina, a public nuisance is defined by its consequences, and broadly includes "acts or conditions are subversive of public order, decency, or morals, or North Carolina County Opioid Litigation - Privileged and Confidential 9 13 constitute an obstruction of public rights. Such nuisances always arise out of unlawful acts." State v. Everhardt, 203 N.C. 610, 617, 166 S.E. 738, 741 -42 (1932). To constitute a public nuisance, the condition of things must be such as injuriously affects the community at large, and not merely one or even a very few individuals.... Whatever tends to endanger life, or generate disease, and affect the health of the community; whatever shocks the public morals and sense of decency; whatever shocks the religious feelings of the community, or tends to its discomfort-is generally, at common law, a public nuisance, and a crime. Twitty v. State, 85 N.C.App. 42, 49, 354 S.E.2d 296, 301 (N.C.App.1987), citing Everhardt, 203 N.C. at 618, 166 S.E. at 742; see also Restatement (Second) of Torts § 82IB. Critical circumstances, any one of which can create a public nuisance, include: • significant interference with public health, safety, peace, comfort, or convenience, • conduct contrary to a statute, ordinance, or regulation, or • conduct in which the defendant continues to engage despite knowing, or having reason to know, of significant impairment of the public's rights. See Restatement (Second) of Torts § 821B. The opioid distributors have violated each of these tenets, as they have severely infringed public rights and interests, ensured continual circumvention of state and federal laws, and persisted in this conduct despite being aware of the terrible consequences. Those allegations state a public nuisance claim under North Carolina law. 3. Available Relief Under North Carolina law Counties may seek injunctive relief in order to abate the opioid epidemic as a nuisance, including requiring the wholesale distributors to forfeit income earned through their unlawful activity. Upon judgment against the defendant or defendants in legal proceedings brought pursuant to this Article, an accounting shall be made by such defendant or defendants of all moneys received by them which have been declared to be a nuisance under this Article. An amount equal to the sum of all moneys estimated to have been taken in as gross income from such unlawful commercial activity shall be forfeited to the general funds of the city and North Carolina County Opioid Litigation - Privileged and Confidential 10 14 county governments wherein such activity took place, to be shared equally, as a forfeiture of the fruits of an unlawful enterprise, and as partial restitution for damages done to the public welfare; provided, however, that no provision of this Article shall authorize the recovery of any moneys or gross income received from the sale of any book, magazine, or exhibition of any motion picture prior to the issuance of a preliminary injunction. Where the action is brought pursuant to this Article, special injury need not be proven, and the costs of abatement are a lien on both the real and personal property used in maintaining the nuisance. Costs of abatement include, but are not limited to, reasonable attorney's fees and court costs. N.C. Gen. Stat. Ann. § 19 -6. B. Federal RICO Action. We also recommend filing a claim under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), which provides for recovery of treble damages and attorney's fees,6 and presents an opportunity to intensify the pressure against opioid manufacturers and wholesale distributors by substantially increasing their litigation risk. Fundamentally, a RICO claim consists of an enterprise and a pattern of racketeering activity (i.e., a predicate act). The federal RICO statute is designed "to protect the public from those who would run organization[s] in a manner detrimental to the public interest." Cedric Kushner Promotions, Ltd. v. King, 533 U.S. 158, 165 (2001) (alteration in original) (quotation marks omitted). A RICO claim "requires (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496 (1985) (footnote omitted). To plead a RICO cause of action under 18 U.S.C. § 1964(c), a plaintiff must establish a predicate violation. Mail or wire fraud violations are potential predicate acts. 18 U.S.C. § 1961(1)(B) (providing that racketeering activity includes 18 U.S.C. §§ 1341 (mail fraud), 1343 6 A person who successfully asserts a civil RICO claim "shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." 18 U.S.C. § 1964(c). North Carolina County Opioid Litigation - Privileged and Confidential 11 15 (wire fraud)). Elements required to establish a mail or wire fraud claim are: (1) a scheme or artifice to defraud or obtain money or property by mean of false pretenses, representations or promises; (2) a use of the mails or interstate wires for the purpose of executing the scheme; and (3) a specific intent to defraud, either by devising, participating, or abetting in the scheme. See 18 U.S.C. §§ 1341 (mail fraud), 1343 (wire fraud). The heart of a mail or wire fraud offense is the scheme to defraud: any "mailing [or wire communication] ... incident to an essential part of the scheme ... satisfies the mailing [or wire] element." Schmuck v. United States, 489 U.S. 705, 712 (1989) (citation and quotation marks omitted). The elements of a RICO claim predicated on mail and /or wire fraud can be met even if the actual infonnation mailed or communicated by wire "contain[s] no false information." Id. at 715. In addition, we would consider bringing RICO claims against opioid manufacturers and wholesale distributors based on their failure to comply with certain controlled substances laws. 18 U.S.C. § 1961(1)(A). C. Other Possible Causes of Action. In addition to standing to pursue nuisance actions, the Counties may also have common law actions for negligence per se related to the distributors' violations of North Carolina statutes, for fraud, restitution or unjust enrichment. North Carolina County Opioid Litigation - Privileged and Confidential 12 0 CLAIMS AGAINST OP10I1) DISTRIBUTORS AND MANUFACTURERS The country is in the midst of a public health crisis stemming from the flood of opioids pouring into her cities and counties. The opioid epidemic has been fueled by the greed of the corporate elite, such as Fortune 500 behemoth McKesson Corp., failing to detect and report "suspicious" orders of opioids, despite being required to do so by federal and state law. In January 2017, McKesson, the largest drug distributor in the nation., was fined a record $150 millionn by the federal government for its blatant failure to report suspicious orders in violation of federal lax. Cardinal Health, another nienther of the "Big Three" drug distributors, was fined $44 ►pillion for its own failures to report suspicious narcotic orders to the DEA. Substantially all prescribed opioids must flow through the distributors: federal law requires that opioids be distributed through a closed system. The role of the distributors in this chain is to spot and report red flags in the distribution chain. McKesson, Cardinal and their distributor cronies admit that they are the gatekeepers — the watch dogs — for preventing opioid abuse, stating: "distributors are uniquely situated to perform due diligence in order to help support the security of the controlled substances.. and reduce the possibility that controlled substances within. the supply chain will reach locations they are not intended to reach. "I The distributors make this admission in the Industry Compliance Guidelines they themselves created to comply with legal mandates — and then wholly ignored. Instead of instituting controls to stop opioid abuse and alerting authorities to suspicious orders, the distributors instead have chosen to abuse their privileged position, lining their pockets by shipping massive quantities of drugs to pharmacies and dispensaries without performing any checks. The cities and counties impacted by effects of this corporate greed are left to pay the freight for this malfeasance through increased healthcare and law enforcement costs - and through the lives of their citizens. Cities and counties have the means to hold these distributors accountable for their actions and to stop the influx of these powerful drugs. Federal and many state laws require distributors identify, investigate, and report suspicious orders of controlled substances. The distributors' known violations of these laws give rise to strong claims for significant equitable and monetary relief. Distributors of opioid medications are vulnerable to damage claims and penalty actions under theories such as public nuisance, negligence, and RICO. Potentially recoverable damages may include (1) money wrongfully paid for opioids through government - payor programs including employee insurance; (2) costs for providing medical care, additional therapeutic, and prescription drug purchases, and other treatments for patients suffering from opioid - related addiction or disease, including overdoses and deaths; (3) costs for providing treatment, counseling, rehabilitation services; (4) costs for providing treatment of infants born with ' See Healthcare Distribution Management Association (HDMA) Industry Compliance Guidelines: Reporting Suspicious Orders and Preventing Diversion of Controlled Substances ( "Industry Compliance Guidelines" or "Guidelines "). 1 17 opioid - related medical conditions; (5) costs for providing welfare or protective services for children whose parents suffer from opioid - related disability or incapacitation; and (6) costs directly associated with law enforcement and public safety relating to the opioid epidemic. Local governments may also be entitled to injunctive relief to prevent farther unlawful distribution of these drugs. This memorandum identifies causes of action through which cities and counties can hold responsible the distributors and manufacturers of opioids who have fueled the opioid epidemic. I. Wholesale Distributors and Manufacturers Are Required under Federal Law to Monitor for and Report Suspicious Orders of Opioids. A. The Role of Wholesale Distributors in the Opioid Distribution Chain. Pharmaceutical distributors are supposed to play the role of "beat cops" in preventing the flow of controlled substances to abusers. Congress enacted the Controlled Substances Act ( "CSA ") in 1970 with the express purpose of creating a "closed system" for the distribution of controlled substances designed to prevent the diversion of legally produced controlled substances into illicit markets.2 Through the CSA, Congress stripped the manufacturers of the ability to sell directly to retailers, intentionally creating a link in the chain of distribution between Big Pharma and the pharmacies. This link is the wholesale distributor. There are only 800 registered wholesale distributors in the United States. Three Fortune 500 companies own 85% of the market share: Cardinal Health, AmerisourceBergen and McKesson Corporation. Each company generates over $100 billion in revenue annually. Because the CSA creates a "closed system" in which opioid dispensers -- like pharmacies — must obtain opioids from opioid distributors, these distributors are "uniquely situated" to spot red flags in the opioid chain, as they note in their own industry guidelines. The distributors are the first line of defense against the diversion of these drugs that can lead to abuse, addiction, and blight. The closed chain of distribution under the CSA is designed to ensure that all controlled substances are accounted for as they make their way from the manufacturer to the end user. As would be expected, all who encounter controlled substances within the distribution chain are required to keep meticulous retards. For example, pursuant to 21 C.F.R. § 1305.13(d) distributors of controlled substances must forward a copy of every order filled to the DEA. B. Wholesale Distributors Are Required to Monitor for and Report Suspicious Orders of Opioids under Federal Law and the Law of Many States. 'See 21 U.S.C.A. §§ 801 -971 (2006); 21 U.S.C.A. §§ 1300 -1321 (2009); H.R. Rep. No. 91 -1444; 1970 U.S.C.C.A.N. 4566, 4572 (Sept. 10, 1970). 2 , To further combat diversion of controlled substances, the distributors are legally required under federal law to be on alert for suspicious controlled substance orders by pharmacies — such as orders of unusual size, frequency, or pattern — and to report these unusual orders to the relevant authorities so that they can be investigated. Federal law charges registered wholesale distributors with the non - delegable duty to "design and operate a system to disclose ... suspicious orders of controlled substances. The registrant [distributor] shall inform the Field Division Office of the Administration in his area of suspicious orders when discovered by the registrant. Suspicious orders include orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency." 21 C.F.R. § 1301.74(b). While the suspicious order reporting requirement is certainly entrenched in federal law, many states have taken the additional step of making this a state law requirement as well. States such as West Virginia, Indiana, and South Carolina, among others, require wholesale distributors to report suspicious orders of opioids to their state pharmacy boards. C. Wholesale Distributors Have Been Warned of and Have Admitted Their Obligations. The distributors have been on specific notice of their duties with regard to suspicious orders since at least September 2006, when the DEA sent distributors letters referencing the federal CSA monitoring and reporting requirements and providing guidance on what may constitute a "suspicious order." These letters identified diversion and abuse of controlled prescription drugs as a "serious and growing health problem," commanded that "distributors must be vigilant" in determining who can be trusted to receive controlled substances, reminded distributors of their obligation to identify and report suspicious orders, and provided guidance on what circumstances may be indicative of diversion. The wholesale distributors have readily admitted their monitoring and reporting obligations. The major pharmaceutical distributors (the potential defendants here) are members of the Healthcare Distribution Alliance ( "HDA ") (known until mid -2016 as the Healthcare Distribution Management Association, or "HDMA "), a trade association that represents pharmaceutical distributors throughout the Americas. Such members include, for example, McKesson, AmerisourceBergen and Cardinal Health, the heads of which also sit on the HDA executive committee and board. This membership is significant because, in response to DEA requirements that distributors investigate and report any suspicious controlled substance orders, HDA created "Industry Compliance Guidelines" for pharmaceutical distributors. These Guidelines, which were developed with the "strong endorsement and expertise of [HDA] members" not only function as admissions of the member distributors' duties, but also serve to set out the industry standards to which these distributors may be held. The distributors created these Guidelines "in recognition of a growing problem of misuse and diversion of controlled substances," so that the distributors could "further scrutinize purchase 3 19 orders for these products," as they were required to do by law. As noted above, the distributors admit that they "are uniquely situated to perform due diligence in order to help support the security" of controlled substance distribution.3 The Guidelines set out "Know Your Customer Due Diligence" standards with respect to all distributor customers — which, in the context of the Guidelines, comprise pharmacies and other legal dispensaries. These due diligence standards include gathering detailed information on the customer base of a pharmacy, the quantity of prescriptions filled each day, the quantity of controlled substance prescriptions filled each day, and the percentage of controlled substance purchases compared to overall purchases, and then utilizing this information to compare orders to a "threshold" profile to identify orders of unusual size, frequency or pattern. When confronted with "unusual" orders, the distributors' own Guidelines dictate that they should stop the shipments, investigate the orders under steps that are listed in the Guidelines, and report the suspicious activity to the DEA. These industry standards clearly establish that the duty of care for pharmaceutical distributors includes identifying, investigating, and reporting suspicious orders of controlled substances. Distributors have chosen to abandon their duties, thereby enabling the diversion of opioids and helping to create the present epidemic. The distributors have not performed adequate due diligence and have failed to report suspicious orders, breaching the very industry standards they, themselves, created. In doing so, the distributors have violated their duties of care and both federal and state law. D. "ARCOS" Data Contains Key Evidence of the Distributors' Breaches. One of the ways wholesale distributors are to maintain controls against the diversion of prescription opiates is by inputting all distributions in the DEA Automation of Reports and Consolidated Orders System (ARCOS) database.4 This database contains monthly reports from each wholesale distributor and documents the number of doses of each controlled substance sold to every pharmacy on a monthly basis. The wholesale distributors were required to monitor this data for suspicious orders. When "suspicious orders" were identified based on this regularly reported data, the wholesale distributors were required to halt shipment, perform an on -site investigation, determine whether a risk of diversion is present, and report the threat of diversion directly to the relevant authorities, including the DEA. "Suspicious orders" are defined by guidance letters provided by the DEA as well as corporate policies and industrial practices, federal law, and state law, which further define the term. 3 ,See HDMA Industry Compliance Guidelines. 4 See United States v. Four Hundred Sixty Three Thousand Four Hundred Ninety Seven Dollars & Seventy Two Cents ($463,497.72) in U.S. Currency From Best Bank Account, 779 F. Supp. 2d 696, 709 (E.D. Mich. 2011). 4 20 For instance, any pharmacy order which exceeds 10% of the prior month's order would be considered a "suspicious order." 5 The information in the ARCOS database is confidential. The public has never seen the data related to the volume of prescription opiates distributed in each community. That changed when a journalist from the Charleston Gazette gained access to records sealed in a lawsuit filed by the West Virginia Attorney General against the wholesale distributors. The data revealed that 780 million prescription opiates were distributed in West Virginia (population 1.8 million) during a six -year window of time. The journalist, Eric Eyre, recently won the Pulitzer Prize for his investigative journalism. Cities and counties have the ability through local law enforcement and cooperation with the DEA to seek and obtain historical ARCOS data. Because this information contains a record of every order filled by each pharmaceutical distributor, a review of those orders would allow for a determination of how many suspicious orders were not flagged by the distributors. This lack of real -time monitoring and reporting by the distributors stripped cities, counties and the DEA of their ability to timely identify, investigate, and prevent the diversion of the highly addictive drugs at issue. E. The Duty to Report Suspicious Orders Extends to Opioid Manufacturers In July of this year, the DEA for the first time sanctioned an opioid manufacturer for failing to report suspicious opioid orders. Pursuant to a memorandum of understanding between manufacturer Mallinckrodt and the DEA, Mallinckrodt paid a $35 million civil penalty for violating federal laws that mandate suspicious order reporting. Specifically, Mallinckrodt was operating what is known in the industry as a "chargeback" system. Mallinckrodt sold opioids to a wholesale distributor at a higher than usual price, and then offered the distributor a substantial rebate in exchange for the distributor's downstream customer sales information or "chargeback data ". This chargeback data allows manufacturers, like Mallinckrodt, to obtain knowledge of suspicious opioid orders. Manufacturers of controlled substances are under the same legal obligations as distributors to prevent drug diversion and are similarly required to notify DEA of suspicious orders received from their customers. The Mallinckrodt -DEA agreement requires that manufacturers review chargebacks and other data and report suspicious orders in underlying sales from distributors to downstream customers. The "chargeback" system is not unique to Mallinckrodt. Our investigation has discovered that this practice is widespread throughout the industry, and that manufacturers have embraced shipping suspicious orders of opioids as an integral part of their business model. Therefore, 5 See Southwood Pharmaceuticals, Inc., 72 FR 36487 (2007); Cardinal Health, Inc. v. Holder, 846 F. Supp. 2d 203 (D.D.C. 2012). 5 21 manufacturers of opioids such as Purdue Pharma, Teva, Endo, Cephalon, and Janssen may also be liable for opioid - related damages. Distributor Defendants: The three largest pharmaceutical distributors, the "Big Three," are McKesson Corp., Cardinal Health, and AmerisourceBergen. 2016 revenues for each were approximately $147 billion, $97 billion, and $133 billion, respectively. The Big Three are all members of HDA, and their presidents and CEOs sit on the HDA Executive Committee and Board. The Big Three have been subject to heavy fines and/or investigation for their failure to monitor for and report suspicious orders. in January 2017, McKesson entered into an agreement with the DEA in which they agreed to pay $150 million in settlement payments for failing to maintain effective controls against diversion of controlled substances. This specifically included the failure to report to the DEA suspicious orders of controlled substances. In May of 2012, Cardinal Health entered into an agreement with the DEA where they resolved allegations that they failed to maintain effective controls against the diversion of controlled substances by failing to detect and report suspicious orders relating to their distribution center in Lakeland, Florida, and in December of 2016, Cardinal Health agreed to pay a civil penalty of $34 million relating to this conduct. AmerisourceBergen has not yet paid any civil penalties to the DEA, but it has been subjected to similar allegations. Manufacturer Defendants: Manufacturers of opioids who may be responsible for damages to cities and counties include Purdue Pharma, Teva Pharmaceuticals, Janssen Phannaceuticals, Endo Health Solutions, Cephalon, and Allergan. These companies are all in business of manufacturing opioid pain medication such as oxycodone, hydrocodone, or fentanyl. In addition to failing to report suspicious orders of opioids, as detailed above, it is also widely documented that all of these entities played a role in increasing the consumer demand for opioids by falsely advertising the risks of addiction associated with these drugs. In fact, Purdue Pharma has paid over $600 million in fines related to allegations of misbranding its best - selling drug, OxyContin. Causes of Action: Public Nuisance There is no doubt that the overbearing presence of opioids plaguing cities and counties can be described as a public nuisance. The Restatement Second, Torts § 821B in part defines public nuisance as conduct that "involves a significant interference with the public health...." The conduct of the distributor and manufacturer defendants had a devastating effect on public health, safety and welfare and they should be required to fund the measures necessary to abate the nuisance. R WA Negligence The distributors and manufacturers also face liability for negligence. The standard of care is established by the industry standards as outlined in HDMA's "Guidelines," the applicable federal statutes and regulations, and by related state law. Distributors and manufacturers violated this standard of care by breaching their duty to identify and report suspicious opioid orders to the DEA or other relevant state agencies. There is no doubt that these violations directly contributed to the opioid epidemic that is running rampant across the nation, and without question, substantial damages have been incurred by cities and counties. These costs should be borne by the negligent distributor and manufacturer defendants. Racketeer Influenced and Corrupt Organizations Act ( "RICO ") As the curtain continues to be pulled back and more information becomes available on the distribution methods of opioid distributors and manufacturers, it becomes clearer that these entities were working hand -in -hand to maximize profits at the expense of the health and well -being of American citizens. The RICO statute is the perfect tool to expose these companies and their behavior, and to hold them accountable for the harm they have caused. Conclusion: The crack in the armor of the ARCOS database that began in West Virginia has revealed just how expansive the scope of the opiate epidemic is, as well as its origin. No one could have imagined how pervasive prescription opioids have become in our communities. We have devised a team of lawyers equipped to cut off the opioid supply at the source — the wholesale distributors and manufacturers - and to stop the infiltration of these drugs to your communities, and to help make a difference in U.S. cities and counties. 7 H PCB : D Hill, Peterson, Carper, Bee & Deitzler-, PLLC The Law Firm of Hill, Peterson, Carper, Bee & Deitzler, PLLC, began in 1980, when senior partner, R. Edison Hill, departed a large corporate and insurance defense firm to begin a small personal injury practice. The firm's attorneys represent individuals and families in many diverse areas of complex litigation including water contamination, personal injury, pharmaceutical and defective medical devices, and medical malpractice. The firm's attorneys were awarded the prestigious Trial Lawyer of the Year award by Public Justice in 2005 for their work on the successful class action litigation Leach, et al. v. E. L du Pont de Nemours and Company involving representation of plaintiffs who suffered various cancers and other illnesses due to exposure through drinking water to the chemical ammonium perfluorooctanoate ( "PFOA" or "C -8 "), a chemical utilized in the manufacture of Teflon. The firm's attorneys also served on the Plaintiffs Steering Committee for In re: E. I. Dupont de Nemours and Company C -8 Personal Injury Litigation, which has reached a global settlement of close to $1 billion. Hill, Peterson, Carper, Bee & Deitzler, PLLC, has been designated by `Benchmark Plaintiff' (The Definitive Guide To American Leading Plaintiff Firms & Attorneys) as one of West Virginia's three top and "highly recommended" litigation law firms. R. Edison (Ed) Hill is a trial attorney and the founder and a member /partner of Hill, Peterson, Carper, Bee & Deitzler, PLLC. Mr. Hill has served as class action counsel for numerous certified class actions, including Burch, et al. v. American Home Products Corp, et al. (Fen -Phen Diet Drug Litigation), the largest pharmaceutical class action in the history of West Virginia, and Leach, et al. v. E. I. du Pont de Nemours and Company. He also serves on the Plaintiffs Steering Committee for In re: E. I. Dupont de Nemours and Company C -8 Personal Injury Litigation, which recently reached a settlement valued at nearly $1 billion. Mr. Hill was named as one of "America's 100 Most Influential Trial Lawyers" by The Trial Lawyer's RoundTable in 2017 and has been designated as one of West Virginia's twelve "Litigation Stars" by Benchmark Plaintiff (The Definitive Guide To American Leading Plaintiff Firms & Attorneys). He has also been named as a Fellow of the West Virginia Bar Foundation, awarded to "lawyers whose professional, public and private careers have demonstrated outstanding dedication to the welfare of their communities and honorable service to the legal profession with the individuals selected reflecting the diverse nature of the legal profession in West Virginia." Mr. Hill is involved in many legal professional organizations, including American Association for Justice (Life Member), National Trial Lawyers Association (Executive Committee Member), West Virginia Trial Lawyers Association (Past - President and current Board of Governors member), Public Justice Foundation, Lawyer- Pilots Bar Association, Southern Trial Lawyers Association and the Consumer Attorneys of West Virginia. He has been named a West Virginia Super Lawyer® each year from 2009 the present. He also serves as Chairman for the Central West Virginia Regional Airport Authority, which is the governing board for Yeager Airport, located in Charleston, West Virginia. He has served on the Yeager Airport Board of Directors since 1993. James C. Peterson has been a member /partner at Hill, Peterson, Carper, Bee & Deitzler, PLLC since 1983, focusing his legal practice on litigation of severe personal injury, medical /legal malpractice, product liability, insurance bad faith, mass tort/class action involving defective products, pharmaceuticals and insurance issues. He served as co -lead counsel for on the settlement of the largest pharmaceutical class action litigation in the history of the State of West Virginia, involving the diet drug Fen -Phen (Burch, et al. v. American Home Products Corporation, et al.). Settlements and verdicts handled on behalf of his firm Hill & Peterson or on a co- counsel basis exceeds $1.6 billion. Representative mass tort/class action in addition to Burch includes McCallister, et al., v. Purdue - Pharma, Inc., et al. (Oxycontin - potent pain killer drug); VIOXX Products Liability Litigation, MDL 1657 (osteo - arthritic pain medication); In Re: E. I. Dupont de Nemours and Company C -8 Personal Injury Litigation, MDL 2433 (involving representation of 3,500 plaintiffs who suffered various cancers and other illnesses due to exposure to C -8, a chemical used in the manufacture of Teflon, in public drinking water; global settlement reach in 2017 for close to $1 billion.); and Good v. American Water Works Company, Inc., et al., Case No. 2:14 -CV -01374 (putative class alleging economic and personal injury loss due to water contamination, tentative settlement reached Fall 2016, for over 250,000 residents and businesses in the 9 -county area). Mr. Peterson has been board- certified as a civil trial specialist by the National Board of Trial Advocacy (NBTA) since 1990; named member of the year by the West Virginia Trial Lawyers Association in both 1988 and 1993; served in a variety of positions with both state and national trial lawyer organizations, including president of the West Virginia Trial Lawyers' Association (1996- 1997); and admitted to practice in the states of Minnesota, Ohio, and West Virginia. Since 1987, Mr. Peterson has presented over 40 papers and articles nationwide on various legal topics in over two dozen states. He authored a chapter for a National Brain Injury Association publication involving hedonic damages, and an article on the same for TRIAL Magazine (published by American Association for Justice). Mr. Peterson is recognized as a life member of American Association for Justice (AAJ), an honor bestowed on approximately 50 lawyers for that nationwide trial organization. He was selected in 2005, along with two of his partners Ed Hill and Harry Deitzler, as Trial Lawyers of the Year by Public Justice. NorthGate Business Park, 500 Tracy Way, Charleston, WV 25311 -1260 1800-822-5667 1 www.hpcbd.com North Carolina County Opioid Litigation - Privileged and Confidential 71 MC 1UG 1 fIlULLER 24 L AW GROLiP McHugh Fuller Law Group is a trial firm based out of Hattiesburg, Mississippi that specializes in complex litigation and trials in the health and medical fields. With only eight members, the firm functions as an elite trial team made up of experienced litigators and legal writers. The attorneys at McHugh Fuller are admitted to practice law in eighteen states including Mississippi, Florida, Texas, Alabama, Arkansas, Georgia, Illinois, Kentucky, Michigan, Missouri, New Hampshire, New York, Ohio, Oklahoma, Pennsylvania, Tennessee, West Virginia, Wisconsin, and the District of Columbia. Our lawyers have tried over one hundred cases, obtaining multi - million dollar verdicts in courts throughout the country. The attorneys at McHugh Fuller have amassed over three- hundred million dollars in jury verdicts alone, and have successfully handled appeals before State Supreme Courts and Courts of Appeal in seven states, numerous Federal District Courts, the 4th, 5th and 1 l th Circuit Courts of Appeal and the United States Supreme Court. Michael J. Fuller is a senior partner and founding member of McHugh Fuller Law Group. Throughout his career, Mr. Fuller has dedicated his career to the protection of people. Upon graduating from the University of Florida College of Law, he joined the Hillsborough County State Attorney's Office and spent several years protecting the residents of Tampa Bay as a prosecutor. From there, Mr. Fuller joined a national law firm that specialized in representing and protecting the elderly from abuse and neglect in nursing homes and assisted living facilities. In 2006, Mr. Fuller and James B. McHugh decided to start their own firm and, once again, dedicated their efforts to those who could not protect themselves, particularly those confined to health care institutions. Since 2006, Mr. Fuller has worked to put together an elite trial team consisting of experienced litigators and legal writers that can litigate and try complex medical cases against billion dollar national defendant corporations. Through the leadership of Mr. Fuller and Mr. McHugh, the attorneys at McHugh Fuller Law Group have amassed verdicts of over 300 million dollars on behalf of their clients and have successfully handled appeals before State Supreme Courts, Courts of Appeal, numerous Federal District Courts, the 4th, 5th, and l Ith Circuit Courts of Appeal and the United States Supreme Court. Mr. Fuller is licensed to practice law in the District of Columbia, Florida, Georgia, Kentucky, Michigan, Mississippi, Missouri, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Wisconsin. Amy Quezon has been practicing law and trying cases since 1993. After graduating from Stetson College of Law in 1992, she joined the State Attorney's Office in Hillsborough County, Florida. She spent approximately six years as a prosecutor trying hundreds of criminal cases. By the time Ms. Quezon left the State, she was a lead trial attorney responsible for the prosecution of violent felonies and trafficking cases. Since 1998, Ms. Quezon has been litigating and trying complex medical and health- care related cases throughout the country. She has tried cases in multiple states, obtaining verdicts of close to 200 million dollars on behalf of her clients. She was co- lead trial counsel on a $91.5 million dollar verdict for a case in West Virginia which was upheld in large part by the West Virginia Supreme Court and in which the United States Supreme Court ultimately denied cert. She is admitted to practice law in eleven states. Ms. Quezon is married and has four children. Her oldest son is in law school at Stetson Law, her daughter is in nursing school at the University of Florida, her son is a senior in high school and she and her husband recently adopted a four - year -old little boy out of Foster care. 97 Elias Whiddon Road, Hattiesburg, MS 39402 1601-261-2220 1 www.mchughfuller.com North Carolina County Opioid Litigation - Privileged and Confidential 72