purdue pharma's legal history

​

-

​

The 2007 settlement

​​

The Purdue Pharma bankruptcy case is a Chapter 11 restructuring—an infamous type of bankruptcy case that puts into effect a reorganization of the company to prevent it from collapsing and allow it to pay off its debts over time with a several-year plan.

​

By 2002, Purdue Pharma was paying $3 million in legal bills per month and facing a heap of outstanding lawsuits. Amid these worries, the Sackler family turned to Rudy Giuliani and his firm Giuliani Partners for assistance. Giuliani’s job, according to the New York Times, was to assure “public officials they could trust Purdue because they could trust him.” With the best lawyers money could buy, Purdue crushed its poor and vulnerable civil suit plaintiffs in court. Howard Udell, the company’s general council, promised that Purdue would not settle these “absurd” suits. So when it was revealed in 2005 that Purdue was under federal grand jury investigation, many victims’ families had little hope. “They were all lawyered up and Rudy Giuliani’d up,” remembered one bereaved father connected to the case. For years, Purdue had been using Giuliani for double-duty: bullying as the “heavyweight lawyer” who would scare and disarm opposing counsels while schmoozing as the D.C. politician working his many connections to benefit the Sacklers from inside the political machine.

 

But the 2005 case was different. Rather than resorting to proving Purdue had caused the opioid crisis, a difficult case to make, prosecutor John Brownlee and his team found a technical legal definition that lowered the bar for holding Purdue accountable. All they had to show was that Purdue had misbranded its pharmaceutical asset—proof of harms was not required. Brownlee “compiled a growing trove of ammo” in the case: hard evidence that the Sacklers had intentionally deceived the public about the addictiveness of their drug, creating an airtight case for the misbranding charge. By 2006, Giuliani and the rest of Purdue’s legal associates sensed the turning of the tide. Their hallmark “full-court press” of exhausting plaintiffs with drawn-out legal costs, months-long battles, and intimidation tactics wasn’t working anymore.

 

After months of what some might call playing dirty—including whining to then-deputy attorney general James Comey that Brownlee had overstepped, asking for a deadline extension the night before the expiration of the settlement, and allegedly putting Brownlee’s name on a firing list—Purdue’s lawyers switched from scare tactics to legal finesse. When the feds proposed that Purdue settle the claims by shelling out a cool $1 billion, the company responded with the insulting counteroffer of $10 million. Purdue’s legal team lobbied to shield the company executives from felony charges and claim in the settlement that they had no direct involvement in the crimes. Worse still, Giuliani arranged to have the holding company, Purdue Frederick, held responsible for the infractions. The prohibitions placed on the parent company did not affect Purdue Pharma, and it was allowed to continue selling OxyContin.

In the final 2007 settlement, Giuliani “negotiated an agreement which immunized the company from further prosecution” for its crimes that had continued past the date of the dossier. The company had been charged for crimes that had occurred only up to 2001; in order to prevent future indictment for crimes committed in the six intermittent years, Giuliani forced an agreement that the government would not prosecute Purdue Pharma for the intervening years. Purdue was found guilty on federal charges and paid $634.5 million—but Purdue and the Sacklers remained untouched. This legal win was a loss for the American people. “The 2007 case was not supposed to end the way it did,” laments Patrick Radden Keefe of New Yorker.

​

-

​

Purdue's Bankruptcy​

 

Even in the past decade, the Sacklers have not abandoned their predatory marketing strategies. In 2013, they approved a marketing program called “Evolve to Excellence” that marketed to doctors who had a history of prescribing up to “25 times more OxyContin [than] their peers.” But Giuliani’s dealings protected the Sacklers from facing the consequences of their actions only up to 2007, so the family was well-aware they could be sued in the future. Emails between the family members show them discussing how to “generate some additional income” and “lever up” to give themselves a cushion in case they were subjected to more lawsuits.

 

Over the past decade, the claims against Purdue Pharma and the Sacklers have piled up. In 2019, Massachusetts attorney general Maura Healey released a revised court filing alleging that Richard Sackler had direct knowledge of the claims the drug was causing and attempted to shift the blame to victims of addiction. She named not only Purdue Pharma but also eight individual Sackler family members as defendants in a New York civil suit, and was the first prosecutor to do so. Within months, damning internal emails had been revealed, showing that Richard Sackler had “embraced a plan to conceal OxyContin’s strength” in order to increase revenue.

 

The Sacklers had been threatening for some time to file for bankruptcy, a scorched-earth move that would leave claimants in the dust, fighting over the company’s scraps. Notably, though, the Sackler family “did not declare bankruptcy themselves.” Instead, they allegedly moved the majority of their money offshore to prevent government seizure. Last year, the New York Times reported that the New York state attorney general’s office had uncovered $1 billion worth of internal wire transfers in the Sackler family, shuffling money into and out of Swiss bank accounts. A few months later it was reported that the Sacklers had funneled 10.7 billion dollars out of company holdings and into family-controlled accounts between 2008 and 2017. Prosecutors have identified some of these as “fraudulent transfers,” and the Sacklers now stand accused by the federal government of illegally transferring money out of the company and into personal accounts. They continue to deny these claims—even in the face of evidence like emails from Jonathan Sackler which state directly, “We’ve taken a fantastic amount of money out of the business…it’s more of a smart milking program than a growth program.”

 

At the time of the bankruptcy declaration, Purdue Pharma’s holdings included “cash and assets of roughly a billion dollars,” Keefe reports. This dramatic change in the company’s net value has prompted North Carolina attorney general Josh Stein to contemptuously refer to the bankruptcy filing as a “sham.” Indeed, Purdue recently requested permission from the bankruptcy court to shell out millions of dollars to high-ranking company officials as bonus payments—including some officials employed at Purdue when the allegations of misconduct were swirling at a fever pitch.

 

Nonetheless, in September 2019, Purdue filed for bankruptcy. Within the month, the New York Times had published excerpts of a 120-page internal memo from the 2007 case, which revealed new and horrifying details about the alleged cronyism in Purdue Pharma’s dealings. For example: Dr. Curtis Wright, the FDA official who greenlit the approval of OxyContin, took a job at Purdue at triple his old salary within a year of approving the drug. Money trails like this one abound, painting a vivid picture of the corrupt practices in which Purdue Pharma is alleged to have engaged.

 

Bankruptcy judge Robert Drain announced in June that any parties seeking restitution from Purdue must file by the end of July. By this past August, 49 states, several territories, and D.C. had filed a combined $2.15 trillion lawsuit against Purdue Pharma. Furthermore, the U.S. Department of Justice revealed that it was engaging in “multiple ongoing investigations” of the company. Although these investigations have been proceeding for years, many suspect that the push to resolve them now is primarily political. “According to multiple attorneys [who] are familiar with these cases, there is tremendous pressure inside the Justice Department to resolve the investigations before Election Day,” writes Keefe. After all, the Trump administration has promised to take action about the opioid crisis. But the haste with which the proceedings are progressing has caused many to worry that we’ll see 2007 unfold again in real time: a “failure dressed up as a success,” in which internal politics will make the terms of the plea much more lenient. We fear that the Sacklers’ considerable political influence, combined with the department’s desire to conclude the proceedings rapidly, have created an unequivocally terrible settlement that will then be paraded as some great victory.

 

-

​

The Settlement Plan

​

In mid-November of 2020, the Justice Department announced that Purdue Pharma will plead guilty to three criminal charges: conspiracy to defraud the U.S. and two counts of breaking federal laws against pharmaceutical kickbacks. Purdue violated these laws when it paid off health and technology companies for facilitating the advertising of its products to doctors. For instance, the DOJ investigated the online platform built by SF company Practice Fusion for creating an alert that reminded physicians to prescribe opioids. (While Practice Fusion suggested adding a disclaimer about the addictive properties of opioids to the alerts, Purdue Pharma “resisted the idea.” How surprising.)

 

The terms of the DOJ-Purdue settlement include:

• 3.54-billion-dollar criminal fine

• 2.8-billion-dollar civil penalty fee

• 1.7 billion dollars toward outstanding lawsuit claims

• 225 million dollars to the Justice Department toward civil suits (paid by the Sacklers)

​

According to the Wall Street Journal, though, even the paltry $8.34 billion that has been promised won’t be met. “The price tag for Purdue [is] largely symbolic,” writes contributor Sara Randazzo. “The bankrupt company’s assets fall well short of $8 billion. It will pay the federal government $225 million, and much of the rest of the fines will be waived to allow more money to flow to states, counties, and tribes that accuse Purdue of sparking widespread opioid addiction and deaths.” Reuters and ABC News concur: “The company…lacks the assets to pay the full amount,” and the “lion’s share” of the monies will be left unpaid.

 

The settlement “allows billionaires to keep their billions,” says Letitia James, the New York Attorney General. Connecticut Attorney General William Tong called the settlement “upside-down” and “a mirage” because there is no guarantee that it will force the Sacklers out of the pharmaceutical business. Worse still, the Sacklers can settle without conceding any guilt. They continue to maintain that their policies were lawful. The settlement will also protect internal Purdue Pharma disclosures, keeping company correspondences that might further implicate the Sacklers under wraps.

 

24 states still oppose the deal, as their attorneys-general made clear in an open letter to William Barr, Attorney General of the United States. These attorneys insist that Purdue should be sold to a private buyer rather than become a public benefit company. Running Purdue publicly would allow the company to use profits from its continued opioid sales toward resolving outstanding debts, and make the states complicit in any ongoing criminal activity. (Read the letter here). “The Sacklers [are] proposing to remediate the damage of the opioid crisis with funds generated by continuing to sell the drug [that] initiated the crisis,” Keefe remarked last year. Given the fact that the company has since filed for bankruptcy and proposes a reorganization plan, his comment has become even more timely.

​

-

​

Chapter 11

​

The Purdue Pharma bankruptcy case is a Chapter 11 restructuring—an infamous type of bankruptcy case that puts into effect a reorganization of the company to prevent it from collapsing and allow it to pay off its debts over time with a several-year plan.

 

The idea of “reorganization bankruptcies” as a favorable alternative to liquidation bankruptcies dates back to the 1800s rail industry. According to Fordham legal professor Richard Squire’s Corporate Bankruptcy and Financial Reorganization, the booming railroad industry brought about a glut in railroad building, leading many rail companies to fail. However, investors realized that liquidation of the failed businesses’ assets would compromise their value: the railroads would provide much more value over time if they simply changed hands and continued to operate than if the tracks and engines were "[sold] off piece by piece." Accordingly, the creditors, rather than being paid off in cash, were given shares in the company: equity for debt.​

​

-

​

The Pprocess

​

After the initial filing of a Chapter 11 bankruptcy—either by the debtor itself or by the petition of three or more creditors jointly—creditors’ actions against the debtor are temporarily frozen while the debtor takes a grace period to develop a plan for the company’s reorganization. This period can be extended by judicial continuances; traditionally, however, it applies only to actions against the debtor. The individual who owns the company that is filing for bankruptcy does not receive protection against lawsuits targeting him personally, nor does the freeze cover suits against other companies he owns.

 

The plan for the reorganization constitutes an agreement between the parties concerning how the company’s operations will proceed and stipulating a payment plan. Plans involve a mixture of liquidation, shares’ changing hands, and reduction of expenses, and require that the debts be paid off within certain time windows.

 

Creditors then vote to accept or reject the proposed plan. There is a substantial bias in favor of accepting, as the alternative is to dispense with the Chapter 11 proceedings altogether and file for a Chapter 7 bankruptcy. Chapter 7 entails complete liquidation, meaning that some creditors could end up empty-handed if the net worth of the company does not make satisfaction for all its debts. Another bias in favor of the debtor is that if the creditors refuse the plan, the company can petition the judge for a “cramdown,” which forces the outstanding creditors to accept the restructuring plan.

​

-

​

Creditors

​

There are three types of creditors in bankruptcy cases: priority unsecured, general unsecured, and secured. Secured claims are backed by collateral; if the debtor defaults, some property is repossessed by the creditor. Car loans and home mortgages are the best-known examples of such debts; failure to pay off these loans permits the creditor to claim the property. If the outstanding portion of the loan exceeds the value of the property, however, the full repayment of the loan cannot be guaranteed. The difference between the two values, if the debtor cannot pay it, may be “discharged.” In a discharged debt, the debtor is absolved of the obligation to pay it, but the creditor does not receive the amount.

 

Nonetheless, the claimant of a secured debt has some safety: he can be assured of receiving at least the value of the property. Unsecured claims, in contrast, are not backed by any property. Priority unsecured claims—like outstanding income taxes and child support payments—take precedence even over property-backed claims because federal law gives them primacy. They are non-dischargeable, and therefore their claimants also enjoy a measure of safety. Unsecured claims that do not have priority, such as personal loans and medical bills, have the lowest concern. They are handled only after priority and secured claims are settled, meaning that the claimant often goes unpaid. The claims against Purdue Pharma are by and large unsecured, meaning that they may be discharged without any payment, even if the Sacklers walk away with billions.

​

-

 

Pros and Cons

​​

Reorganization causes a turnover in shareholders. However, it often does not change the people responsible for the day-to-day operations of the company. Therefore, many Chapter 11 restructurings fail to place a check on the managerial imprudence that led the company into bankruptcy in the first place. A bad boss can exploit the flexibility of a Chapter 11 bankruptcy to remain in control and avoid facing the consequences of his actions.  (Edward Lampert’s buyback of Sears, and his proceeding to run it into the ground again, is one such example.)

 

This lack of turnover, however, is also one of the main redeeming features of Chapter 11 bankruptcies. Chapter 11 can provide a measure of stability and safety to those not responsible for the business’s collapse. Because a restructuring keeps companies running instead of shutting them down, it can prevent mass firings. Liquidations mean a massive loss in jobs; restructurings may allow workers to continue largely undisrupted.

​

-​

​

The Settlement Advantage

​

In a Chapter 11 case, the debtors (in this case Purdue) decide the bankruptcy process at every step of the way. Debtors can state the terms of their bankruptcy, penning a payment plan that is favorable to them. They can dispense with it altogether if the creditors are unsatisfied—and even if taken to task by objecting creditors, they can ask the judge for a cram-down. Put simply, debtors have the advantage in a Chapter 11 case—let alone a Chapter 11 case with a judge as sympathetic to the business interests as Drain has shown himself to be. Debtors are permitted to state the terms of their bankruptcy.

​

​

It is therefore absolutely unacceptable for Purdue to push its settlement

through. It is our obligation to ensure that justice is served.