Focus: Federal Court refuses to approve Vioxx class action settlement
31 may 2013
In brief: The Federal Court recently refused to approve a proposed settlement of the long running Vioxx pharmaceutical class action. While the applicant and respondents had agreed on the terms of the proposed settlement, the Federal Court considered that the settlement would not be in the interests of group members as a whole, and refused to grant its approval. Partner Belinda Thompson (view CV) and Senior Associate Kate Austin examine the decision and its implications.
How does it affect you?
- This decision confirms that a court will not simply 'rubber stamp' a class action settlement that has been agreed by the representative applicant and the respondents.
- When considered in its entirety, the proposed settlement must be fair and reasonable and undertaken in the interests of group members as a whole.
- A proposed settlement which fails to discriminate between the relative strengths and weaknesses of the individual claims of group members may not receive court approval. Similarly, a proposed settlement which favours the interests of the representative applicant and their solicitors above the interests of group members is unlikely to receive court approval.
- Independent advice from Counsel that the proposed settlement is in the interests of group members as a whole will enhance the prospects of the settlement obtaining court approval.
- The approval of class action settlements is currently a topical issue. ASIC has recently appealed the Federal Court's decision to approve a settlement in the Storm Financial class action. ASIC's appeal is concerned with how the settlement sum is allocated between group members who provided funding and those who did not.
Under the federal class action regime, the Federal Court has a supervisory role in relation to class action settlements. Under section 33W of the Federal Court Act 1976 (Cth) (the Act), a class action may not be settled without the approval of the court.1 Until that approval is obtained, any settlement agreed between the parties has no legal effect.2
The Act does not specify the matters a court must take into account when considering whether or not to approve a class action settlement. However, case law has established that in order to approve a settlement, a court must be satisfied that the settlement is fair and reasonable and that it has been undertaken in the interests of group members as a whole, and not just in the interests of the applicant and the respondent.3 In making this assessment, a court must consider:
- the amount offered to each group member;
- the prospects of success in the proceeding;
- the likelihood of group members obtaining judgment for an amount significantly in excess of the proposed compromise amount;
- the terms of any advice received from Counsel and solicitors in relation to the issues that might arise in the proceeding;
- the likely duration and cost of the proceeding; and
- the attitude of group members to the proposed settlement.4
The principal rationale for the court's supervisory role in relation to class action settlements is to 'protect the interests of those who have no voice at the bar table'.5 In other words, to ensure that any settlement does not sacrifice the interests of group members, who, unlike the representative applicant, usually have had little or no involvement in the conduct of the proceeding or the negotiation of the settlement but will nevertheless be bound by its terms.
Because of this, s33X of the Act provides that unless the court is satisfied that it is just to do so, an application for approval of a settlement must not be determined unless notice has been given to group members. This provides group members with the opportunity to object to the proposed settlement should they wish to do so.
Peterson v Merck Sharp & Dohme (Australia) Pty Ltd (VID 451 of 2006) (the Peterson class action), was commenced by Mr Peterson on behalf of all patients who used the arthritis drug Vioxx and then suffered a myocardial infarction (in lay terms, a heart attack). Mr Peterson sued Vioxx's American manufacturer Merck Inc, and its Australia distributor Merck Sharp & Dohme (Australia) Pty Ltd (MSDA) for negligence and for breach of various provisions of the Trade Practices Act 1974 (Cth).
In March 2010, Justice Jessup found for Mr Peterson and awarded him damages of $287,000. MSDA appealed to the Full Court of the Federal Court. As we reported in October 2011, in a decision handed down on 12 October 2011, the Full Court overturned Mr Peterson's success at first instance and upheld MSDA's appeal.
In broad terms, while the Full Court left open the possibility of group members successfully pursuing individual claims, Mr Peterson's personal claim was found to fail primarily on the question of causation. Because Mr Peterson possessed other significant risk factors for heart attack (including hypertension and obesity), the Full Court found that a conclusion that Mr Peterson would not have suffered a heart attack 'but for' the consumption of Vioxx, was 'a matter of conjecture rather than reasonable inference on the balance of probabilities'.6
While reaching this decision on Mr Peterson's personal claim, the Full Court found that Mr Peterson's personal circumstances, including his significant risk factors for heart attack, stood him 'apart from the ordinary case'. Therefore, there may be other group members who, unlike Mr Peterson, could in fact succeed in establishing causation in their individual claims.7
The proposed settlement
At a hearing which took place before Justice Jessup on 17 April 2013, Mr Peterson, with the respondents' consent, sought the court's approval of a proposed settlement of the Peterson class action.8
The proposed settlement involved a procedure whereby the solicitors for the parties would determine (with resolution by an independent practitioner in the event of disagreement) whether a particular group member satisfied the following criteria:
- The event gate criteria: the group member must have a final discharge diagnosis in contemporaneous medical records of a myocardial infarction, or a diagnosis from a treating cardiologist of a myocardial infarction (either contemporaneously or within 14 days of the event), or a sudden cardiac death; and
- The usage gate criteria: the group member must have Vioxx listed as a current medication in the medical records on the date of their relevant inquiry and have documentary evidence of having received a supply of at least 30 Vioxx tablets within 60 days of the injury, or otherwise have documentary evidence of having received at least 30 Vioxx tablets within 40 days of the injury.
Under the settlement proposal, group members who satisfied both of the above criteria would be entitled to payments in accordance with the following terms:
- For living group members: $2000, provided the total of all payments to living group members did not exceed $497,500. Should this be the case, each living group member was to receive one equal share of $497,500.
- For deceased group members: $1500, provided the total of all payments to deceased group members in both the Peterson class action and the Reeves class action did not exceed $45,000. Should this be the case, each living group member was to receive one equal share of $45,000.
Mr Peterson's solicitors, Slater & Gordon, who were party to the settlement agreement, agreed to meet the costs of administering the scheme for the distribution of settlement moneys and agreed not to charge any solicitor/client costs to any of the group members. The respondents agreed to waive their entitlement to costs against Mr Peterson.9
The proposed settlement applied to Mr Peterson and 1660 other group members who had been identified through class closure orders made in August 2010. These orders required group members to register with Mr Peterson's solicitors their intention to advance individual claims by 25 August 2010.10
Reasons for refusal
In a decision handed down on 17 May 2013, Justice Jessup refused to approve the settlement proposal.11 His Honour found that the settlement proposal was neither fair and reasonable nor in the interests of group members as a whole.12 His Honour identified three main concerns with the settlement proposal.
First, his Honour considered that the settlement proposal would represent an 'obvious injustice' to group members who, unlike Mr Peterson, might anticipate a favourable judgment on the question of causation. The gate criteria made no distinction between those group members who have significant risk factors for heart attack and those who do not. Therefore, for group members in similar circumstances to Mr Peterson, the payment of the proposed settlement monies would constitute a windfall. And for Mr Peterson himself, whose personal claim failed and who faced a significant costs liability, the settlement proposal had 'very obvious advantages'.13
In such circumstances, his Honour found that a settlement proposal which sacrificed the stronger claims of group members with no significant risk factors for heart attack in favour of settling the claims of 'less deserving group members', should not be approved by the court.14
Second, his Honour was not persuaded that Slater & Gordon could carry out their role in administering the settlement scheme without inevitably being confronted with a conflict of interest. His Honour expressed concern that the settlement proposal appeared to contemplate that Slater & Gordon would advance the case of every group member who, in their assessment, satisfied the gate criteria. However, once the $497,500 limit had been reached, the admission of every additional group member to the class of accepted beneficiaries would give rise to a reduction in expectation of every previously admitted member.15
Third, his Honour considered that the absence of independent advice from Counsel as to whether the settlement proposal was in the interests of group members as a whole was 'a matter of concern'. While advice had been provided by a solicitor in the employ of Slater & Gordon on this question, his Honour observed that this solicitor was not the 'ideal person' to provide the court with such assistance.16
Slater & Gordon was a party to the settlement agreement and the reality of the respondents' agreement to waive their entitlement to costs as against Mr Peterson 'could not be ignored'. Because of his understanding of Mr Peterson's own circumstances, his Honour considered that he was entitled to infer that Slater & Gordon themselves had 'a very real interest' in securing the settlement to which Peterson and they had agreed. Accordingly, the Slater & Gordon advice carried little weight.17
During the settlement hearing, the parties had urged Justice Jessup simply to adjourn the settlement application, to enable the applicant the opportunity to address the areas of concern raised by His Honour. However, his Honour did not consider this appropriate. His Honour did state that his rejection of the present application will not give rise to res judicata, and that a further application may be made when those matters have been addressed.18
Accordingly, the parties may seek to bring a revised settlement proposal before the court in due course.
- There are equivalent provisions under the Victorian and NSW class action regimes: see s33V of the Supreme Court Act 1986 (Vic) and s173 of the Civil Procedure Act 2005 (NSW).
- See ACCC v Chats House Investments Pty Ltd (1996) 71 FCR 250 at 258 per Justice Branson.
- Ibid. See also Hobbs Anderson Investments Pty Ltd v OZ Minerals Ltd  FCA 801 at .
- See Darwalla Milling Co Pty Ltd v F Hoffman-La Roche Ltd (No 2) (2006) 236 ALR 322 at .
- Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (2011) 196 FCR 145 at 178.
- Ibid at 174 and 178.
- Approval was also sought for a settlement in a related proceeding, Reeves v Merck Sharp and Dohme (Australia) Pty Ltd (VID 859 of 2008) (the Reeves class action). The Reeves class action was not at the same advanced stage as the Peterson class action. The proposed settlement agreement contemplated that the Reeves class action would be settled at the same time as the Peterson class action. Because the court refused to approve the settlement of the Peterson class action, it also refused to approve the settlement in the Reeves class action.
- The terms of the settlement proposal are summarised by Justice Jessup in Peterson v Merck Sharp & Dohme (Australia) Pty Ltd (No 6)  FCA 447 at  to .
- Ibid. at .
- Peterson v Merck Sharp & Dohme (Australia) Pty Ltd (No 6)  FCA 447.
- Ibid at .
- Ibid at .
- Ibid at .
- Ibid at .
- Ibid at .
- Belinda ThompsonPartner,
Ph: +61 3 9613 8667
- Ross DrinnanPartner, Practice Leader, Disputes & Investigations,
Ph: +61 2 9230 4931
- Jenny CampbellPartner,
Ph: +61 2 9230 4868
- Duncan TravisPartner,
Ph: +61 3 9613 8175
- Geoff RankinPartner,
Ph: +61 7 3334 3235
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