Will Chapter 11 Provide a Cure for the Opioid Epidemic?

Insys Therapeutics, a drug company that produced and marketed a fentanyl-based painkiller, filed for chapter 11 protection in Delaware on June 10, 2019.[1] It is the first bankruptcy case of the opioid era, and it will not be the last.[2]

Like the tobacco litigation of the 1990s and the asbestos crisis that led to numerous bankruptcies, the opioid epidemic has given rise to the filing of mass tort claims across the U.S. So far, more than 1,800 state and local governments have filed opioid-related lawsuits against manufacturers, distributors, providers of medical care and other individuals and businesses.

Many more lawsuits are expected from private plaintiffs, as well as federal, state and local governments.[3] As with the tobacco litigation and the asbestos crisis, depending on the particular circumstances involved, chapter 11 may prove to be a useful tool for companies to address opioid-related liabilities.

The Opioid Crisis and Related Litigation

The opioid epidemic kills an estimated 130 Americans every day.[4] In 2017, the U.S. Department of Health and Human Services declared the opioid epidemic a public health emergency.[5] The crisis has become a hot-button issue in U.S. politics[6] and has led to at least one criminal conviction of a pharmaceutical executive.[7]

Unsurprisingly, the epidemic has led to an onslaught of civil litigation against companies that manufacture opioids and other businesses that participate in the opioid market, including but not limited to distributors, medical care providers and insurance companies. Cases include actions brought by state and local governments, federal government civil and criminal actions, multidistrict litigation, attorneys’ general actions and private actions.[8] Some estimates suggest that the aggregate liabilities faced by businesses that participated in the opioid market could run into the tens of billions of dollars.[9]

The multidistrict litigation pending in the U.S. District Court for the Northern District Ohio is widely seen as a bellwether for gauging these liabilities.[10] Among the defendants in the MDL are manufacturers, wholesale distributors and retailers of prescription opioids, among others — i.e., not simply the major manufacturers, but also businesses ancillary to the epidemic.[11] The MDL includes more than 1,000 separate cases largely brought by government entities. The first MDL trial is scheduled for October 2019. In some instances, the parties have been able to achieve a settlement.[12]

Some businesses with potential liabilities are taking other proactive measures as well. For example, Mallinckrodt Plc, a manufacturer of opioid and other products, considered a spinoff of its generics business, at least in part to manage its opioid liabilities.[13]

Chapter 11 as a Solution

Whether chapter 11 is a viable option for a business with opioid-related liabilities depends on a number of factors, including, inter alia, whether liability to government entities is dischargeable in bankruptcy, the extent to which the liabilities are criminal or civil in nature, and whether the liabilities result in the exclusion from state or federal health care programs or the denial of any government licenses necessary for the companies to conduct business.

The extent to which liabilities extend through a corporate structure can be a material factor. For example, a company that is engaged in numerous businesses unrelated to and separate from its opioid lines of business will likely want to keep its non-opioid-related businesses outside of any chapter 11 filing. Further, companies that take proactive measures to ring-fence opioid-related liabilities may fare better than companies that do not take such measures.

In re Insys Therapeutics Inc.

In the case of In re Insys Therapeutics Inc., the company settled a federal investigation for $225 million, then filed for chapter 11 protection just days later. The federal government and Insys subsequently stipulated that the government’s sole remedy for the pre-petition opioid litigation and for any breach of the settlement agreement was to allow the government an unsecured claim in Insys’s chapter 11 case, the recovery on which would be capped at $195 million.[14]

Further, the first-day declaration in Insys stated that the company was facing “extensive litigation” relating to the production of its fentanyl-based product SUBSYS.[15] In fact, Insys noted that it had been named in approximately 1,000 lawsuits at the time of filing. The strategy in the Insys case is to pursue § 363 asset sales and establish litigation claims-estimation procedures to maximize the value of the estate “in a fair and transparent manner.”[16]

Conclusion

In the coming years, the opioid crisis will continue to play out in courtrooms across the U.S. Precisely how these cases will intersect with the bankruptcy courts, and whether chapter 11 proves to be a useful tool for restructuring businesses with opioid-related liabilities, remains to be seen. Although In re Insys Therapeutics Inc. is the first chapter 11 produced by this crisis, more are likely to follow as chapter 11 provides a unique set of tools for addressing mass tort liabilities.