Missouri Municipalities And The Opioid Settlement

by Erich Eiselt

The History

On June 21, 2017, former Missouri Attorney General Josh Hawley filed suit in St. Louis City Circuit Court against three opioid manufacturers—Endo, J&J/Janssen, and Purdue Pharma.1 His complaint cited the defendants’ fraud, misrepresentation, and other violations of the Missouri Merchandising Practices Act (RSMo Ch. 407) in selling and marketing opioids.2 That lawsuit, only the third opioid case brought by a state at the time,3 would become part of a massive nationwide effort, launched by states, tribes, third-party payors, hospitals, Neonatal Abstinence Syndrome (NAS) babies, and more than 3,300 cities and counties, to hold opioid makers, distributors, and dispensers accountable.

One year later, in August 2018, Jefferson County, joined by nine other Missouri counties and one city, filed its opioid complaint in the same St. Louis court.4 The consortium of plaintiffs named 49 defendants across the opioid supply chain, including manufacturers, distributors, dispensers, pharmacy benefits managers, pill mills and others. Eventually, dozens of Missouri localities would become opioid plaintiffs.

The cases took differing trajectories as defendants sought removal on diversity, federal officer, and federal question grounds. The AG, protected when exercising his prerogative to bring a parens patriae action, remained in state court in St. Louis. The county/city cases were rapidly removed to federal court in the Eastern District of Missouri, and then to In re National Prescription Opiate Multi-District Litigation (MDL), the allencompassing MDL before Judge Polster in Ohio’s Northern District.5 Two of those cases were ultimately remanded to Missouri, including Jefferson County’s suit, noteworthy for its focus on the failures of pharmacy benefits managers.6 The rest remained in Cleveland, stayed from further activity.

Across the country, some litigations bore early fruit. In 2019, Oklahoma obtained a $270 million settlement from Purdue, followed by a $465 million judgment against J&J.7 In Ohio, MDL bellwethers Summit and Cuyahoga counties accepted a $260 million settlement from manufacturers and distributors.8 The prospect of continuing warfare drove opioid makers Purdue and Mallinckrodt to file for bankruptcy, establishing multi-billion dollar estates that could be distributed to various classes of creditors including local government plaintiffs.9 Meanwhile, thousands of actions awaited resolution. The Settlement

As a group of major opioid cases moved to trial this summer,10 a pivotal breakthrough finally materialized: on July 21, 2021, AGs from 14 states announced that the “Big Three” pharmaceutical distributors (Amerisource Bergin, McKesson, and Cardinal Health), and Johnson & Johnson had proposed a $26 billion settlement agreement (Settlement Agreement).11 Beyond exacting major payouts from the defendants, the Settlement Agreement requires significant behavioral changes.12 The Big Three, that control the vast majority of America’s pharmaceutical distribution, will reduce competitive secrecy, and establish a common clearinghouse tracking every opioid shipment.13 They will then be required to check that database before making an opioid delivery. If a recipient’s order appears extraordinarily large or suggests diversion, the distributor must notify state and federal authorities and withhold shipment.14 In a related agreement, J&J will completely cease producing opioids.15

The $26 billion figure is a maximum. The Big Three portion, $21 billion, is payable over 18 years,16 costing them much less in terms of present value, even before they apply any potential tax benefits arising from such payments. More than $2 billion goes to legal fees. The payout declines significantly if not all states and their subdivisions accept, potentially reducing the total

by nearly 50%.17 Also, the deal can fail completely if the defendants determine that a sufficient “critical mass” of settling states and their political subdivisions have not been achieved. The Settlement Agreement survived its first test on Sept. 4, 2021, as the Big Three/J&J voted to move ahead, based on 42 states accepting the proposal.18 Those states now have until Jan. 2, 2022, to convince their local governments to join. Most important in the hierarchy are those jurisdictions designated as “Litigating Subdivisions,” a group of 3,795 counties and cities listed in Exhibit C to the Settlement Agreement.

The State-Subdivision Allocation Agreements

The terms and conditions to be used in state-local allocation agreements are significantly influenced by the Settlement Agreement, that requires some major improvements over the massive tobacco litigation settlement two decades ago. The most salient of these is the requirement that at least 85% of all settlement monies must be applied by each state for “Opioid Remediation,” defined as: Care, treatment, and other programs and expenditures (including reimbursement for past such programs or expenditures except where this Agreement restricts the use of funds solely to future Opioid Remediation) designed to (1) address the misuse and abuse of opioid products, (2) treat or mitigate opioid use or related disorders, or (3) mitigate other alleged effects of, including on those injured as a result of, the opioid epidemic.19

Expenditures that qualify as Opioid Remediation include naloxone or other FDA-approved drugs to reverse opioid overdoses; medication-assisted treatment for the opioid-addicted, including the uninsured; education programs; outpatient counseling and therapy; “wrap-around services” including housing, transportation, job placement/training, childcare; treatment for NAS, and more.

The architects of the Settlement Agreement are not leaving the process to chance. In the event that any of the 42 settling states is unable to achieve a definitive state-subdivision compact, Section V of the Settlement Agreement provides the mechanics and distribution percentages which will apply: 15% to the “State Fund,” 15% to the “Subdivision Fund,” and 70% to the “Abatement Accounts Fund.” (The latter is intended to re-allocate monies on a regional basis in response to local applications for funding).

With billions of dollars on the line, settling states are understandably fixated on achieving buy-in among their localities. Ohio was a forerunner in that effort. The “OneOhio” plan was announced in mid-2020 by Governor Mike DeWine and AG Dave Yost. Under their proposal, 11% of any recovery will go to attorney fees; of the balance, 30% will be distributed to local governments, 55% to a foundation that will address addiction, and 15% to the State.20 Because Ohio’s own opioid trial was slated to begin September 20, the State could not wait 120 days to gauge local government buy-in. By Aug.20, 2021, 142 of Ohio’s 143 “Litigating Municipalities” had joined.21

A few states have directly allocated significant percentages to local governments. Notable is North Carolina, whose plan calls for a robust 85% of all settlement funds to go locally.22 Arizona provides 56% directly to its political subdivisions.23 Others have negotiated less generous terms. The Texas agreement, that covers all 254 counties and more than 1,200 other municipal entities, allocates only 15% of settlement funds directly to localities (but forms regional authorities that should move opioid monies around the state);24 Florida’s plan similarly allocates 15% directly to subdivisions.25

The Missouri Scenario

Exhibit F to the Settlement Agreement indicates that Missouri’s payout will be 2.0056% of the total, assuming that all of the State’s subdivisions join. That percentage results in a figure approaching $500 million, that has been widely publicized by AG Schmitt as he rallies local governments with his “Fighting Addiction, Saving Lives” campaign.26 Most important in that effort will be acceptance by the 92 Missouri municipalities identified as “Litigating Subdivisions” in Exhibit C to the Settlement Agreement.

The parameters of AG Schmitt’s State-Subdivision Allocation Agreement are not yet clear (efforts to obtain a proposed Missouri agreement from the AG’s office were unsuccessful as of the

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writing of this article). The Missouri legislature has already ensured that one aspect of that agreement will satisfy the mandates of the Settlement: in August 2020, it passed RSMo 196.1050, that specifically requires that 100% of opioid settlement monies be directed at the epidemic, for remediation, treatment, education, and related purposes. The portion of Missouri’s monies going to the statehouse will be deployed in an opioid abatement and treatment fund overseen by four departments: Mental Health, Social Services, Health and Senior Services and Public Safety, and none will go to legal fees.27

What remains unclear is how much of the Settlement Agreement funds will go directly to local governments. Some recent press accounts describe a reluctance by the AG’s office to discuss the issue of percentages with municipalities, implying that the vast majority of Missouri’s proceeds will be disbursed on terms and conditions controlled in Jefferson City.28

As 2021 comes to a close, Missouri’s political subdivisions have the prospect of evaluating two paths forward, either accepting the deal and their eventual allocation of Settlement Agreement funds, or refusing to join and looking to achieve a better result. Factors favoring acceptance include the speed with which funds will flow to Missouri, (first payments under the Settlement Agreement could start in spring 2022) and the ability to cease litigation-related activity, at least as to the Big Three/J&J. For smaller jurisdictions in the MDL, the July 23, 2021, Case Management Order by Judge Polster mandating that all non-settling jurisdictions in his court promptly deliver plaintiff fact sheets could promote Settlement Agreement acceptance.29

Factors counseling rejection of the deal include ambiguity about whether anything more than minimal dollars will actually reach local treasuries. AG Schmitt, now holding town halls as he runs for United States senate, has recently attempted to reassure holdouts among Missouri’s cities and counties on this point, saying “There’s no money for the State here. The money that comes in is essentially applied for and goes to local communities.”30 Beyond that question is the larger issue of the Settlement Agreement’s magnitude to begin with, particularly when doled out over nearly two decades. States declining the deal have highlighted the inadequacy of payouts when compared to the costs ahead: in his rejection, Washington’s AG Bob Ferguson pointed out that the maximum Settlement Agreement portion potentially payable to his state, $527 million, comparable to Missouri’s $500 million share, amounted to only $30 million per year. When divided among Washington’s 320 cities and counties, the distribution was, in his words, “not a transformative amount.”31 He also noted the success that AGs and municipalities around the country are achieving in their own opioid actions, and pressed forward with his State’s trial in King County Circuit Court beginning Sept. 7, 2021. Many of Ferguson’s critiques are echoed by dissenting local governments; notable is Philadelphia, that immediately rejected the Settlement Agreement and has sharply criticized Pennsylvania’s endorsement of the deal.32

Conclusion

The Settlement Agreement represents a major source of opioid abatement funds, a substantial part of which can be directed to Missouri’s local governments. Additional monies should ultimately flow from the $10 billion Purdue bankruptcy Plan of Reorganization. The last major group of defendants, the national pharmacy chains who filled opioid prescriptions indiscriminately, will likely be forced into paying significant sums.

Meanwhile, the opioid epidemic continues in full force across America, accelerating during Covid as healthcare, counseling, and social services were curtailed. In Missouri, a record 1,842 opioid deaths were recorded in 2020. The need for funding throughout the State, whether for prevention, abatement, emergency response, education or other services, is more urgent than ever. Missouri municipalities will have the opportunity, and the authority, to act in the best interests of their constituents as they seek access to these critical resources.

Erich Eiselt is IMLA's assistant general counsel and director of affirmative litigation. He began his career as a litigator with Anderson Russell in New York City and subsequently served as general counsel of a New York based international data company. Since 2017, he has headed IMLA's Opioid Litigation Group, a collaboration of more than 100 localities as they seek compensation in courts across the country. He is also editor of IMLA's flagship publication, Municipal Lawyer and participates in IMLA's amicus activities including writing appellate briefs in cases before the federal circuits and the Supreme Court. Erich is a graduate of the University of Virginia School of Law, where he served on the editorial board of the Virginia Journal of International Law. He is admitted to practice before the Supreme Court and is a member of the New York bar. Endnotes: Due to print space restrictions, endnotes are available by request. Contact MML at (573) 635-9134 or info@mocities.com to request this article with full endnotes.