Why the Sackler Shield Is at Risk in Supreme Court

26/06/2024

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(Bloomberg) -- The US Supreme Court will soon decide the fate of a $6 billion settlement between members of the Sackler family and their bankrupt drugmaker Purdue Pharma LP, which profited from the sale of the painkiller OxyContin.

Justices are considering a Biden administration challenge to scuttle the agreement. Members of the Sackler family, some of whom together own the company but unlike Purdue are not in bankruptcy, have agreed to fund the drugmaker’s plan for compensating opioid victims and governments. In exchange, the Sacklers would be released from all pending and future civil lawsuits alleging Purdue and its sale of OxyContin helped fuel the nation’s addiction crisis.

The Supreme Court is, for the first time, weighing the legal mechanism used to facilitate that agreement. These mechanisms, called non-consensual third party releases, have become a common feature in bankruptcies filed under Chapter 11 of the US Bankruptcy Code, in which a company can continue operating but must work out a plan to repay its debts. If the $6 billion settlement is rejected, bankruptcy experts have predicted it will result in a major shift in how troubled companies use Chapter 11 to end mass litigation over dangerous products, or how religious organizations settle sex abuse lawsuits. Here’s a primer on the situation.

How did the settlement come about?

Purdue filed Chapter 11 in September 2019. In 2020, Sackler family members agreed to pay the Justice Department $225 million to settle civil claims while Purdue pleaded guilty to three federal felonies related to its marketing of OxyContin. Meanwhile, Purdue’s bankruptcy advisers formulated a plan to resolve its Chapter 11 case with input from government authorities and lawyers representing opioid victims. The $6 billion Sackler settlement the Supreme Court is considering is part of the broader plan Purdue and its stakeholders formulated. A New York bankruptcy judge approved the settlement in 2021, but the deal got tied up in appeals courts. The Supreme Court decided to take the case in August 2023.

Does Purdue Pharma still exist?

Yes. Purdue has continued to operate and sell opioids during its Chapter 11 case. However, members of the Sackler family who own Purdue are no longer involved with the business and the company has been operating under a strict injunction negotiated by the Justice Department, states attorneys generals and other officials.

What happened to the Sackler family?

Members of the Sackler family, who have never faced criminal charges related to Purdue or OxyContin, support the bankruptcy settlement. In court papers, the Sackler family has said that they “emphatically dispute all allegations of wrongdoing against them” and that the settlement averts costly and time-consuming civil litigation that may not succeed. Outside of court, the Sacklers — who were well known in philanthropic circles — have faced public scorn and have had their name removed from museums.

Why is the settlement controversial?

The settlement would force all opioid victims to take the deal and give up potential claims against the Sacklers — even if they don’t want the deal or would rather take their chances with a jury. Congress permitted these types of settlements decades ago in bankruptcies related to asbestos and, over time, lawyers and bankruptcy judges reasoned they could be expanded to cover other corporate wrongdoing.

Federal appeals courts are split over whether the linchpin of these agreements, provisions called non-consensual third party releases, are legal. These types of releases essentially extend the benefit of Chapter 11 to cap liabilities to parties that haven’t filed bankruptcy themselves, in exchange for cash or other consideration.

William Harrington, who as a US Trustee is an officer of the Justice Department unit responsible for overseeing bankruptcy cases, is challenging the settlement and has argued bankruptcy judges lack the power to insulate the Sacklers from lawsuits.

Where else have these settlements been used?

Similar agreements using non-consensual third party releases have been used to end mass litigation over dangerous products and waves of sex abuse lawsuits brought against Catholic dioceses, the Boy Scouts of America and USA Gymnastics.

Do opioid victims support the settlement?

The settlement has broad support from opioid victims who voted on Purdue’s bankruptcy plan, state authorities and other stakeholders. Other opioid victims and some bankruptcy scholars oppose the deal and the prospect of freeing Sackler family members from lawsuits.

Settlement proponents have argued the deal provides victims with more money than they would obtain in a lawsuit against the Sacklers while nothing in the agreement prevents state authorities from pursuing criminal charges.

However, the Biden administration’s top courtroom lawyer, Solicitor General Elizabeth Prelogar, said in a November court filing that forcing Purdue’s owners back to the civil justice system could result in their paying more than the $6 billion currently offered.

How often does the Supreme Court get involved in bankruptcy cases?

The Supreme Court usually hears a handful of bankruptcy cases each term. They are usually resolved with little fanfare, unlike fights over abortion, voting, gun rights and other higher profile disputes.

Bankruptcy law often cuts across the Supreme Court’s normal liberal and conservative idealogical lines. The justices signaled a likely divide over the settlement when the court heard arguments in December, drawing skeptical questions from liberal justices Elena Kagan and Ketanji Brown Jackson and conservative Neil Gorsuch but support from conservative Brett Kavanaugh.

Industry groups and some bankruptcy scholars have said prohibiting these types of deals would result in corporations paying victims less money overall because global settlements would become out of reach. A small number of holdouts must sometimes be forced to take these deals so bankrupt companies’ limited assets are distributed fairly and quickly, they argue. Critics argue Purdue’s settlement and similar deals go too far by stripping victims of their right to a jury trial and overstep the power Congress gave bankruptcy courts to settle debt.

What will happen if the settlement is overturned?

Purdue has said the challenge imperils a proposal to transform the business into a new public benefit corporation that would develop and distribute medications that reverse overdoses and treat opioid addiction. The company also said in a court filing that it’s likely to liquidate if the settlement is overturned. A Purdue creditor committee said if the settlement unravels, almost all victims and other creditors “would be left with substantially less (if anything) years later (if ever).”

What will happen if the settlement is approved?

If justices approve the settlement, Purdue would enact its plan to transform into a new company called Knoa Pharma which would operate with no involvement from the Sacklers. The drugmaker would also be cleared to start compensating opioid victims under the terms of the settlement. Knoa Pharma would operate with a corporate monitor and under an injunction that restricts the promotion of opioid products.

Supreme Court Questions Sackler Shield in Purdue Opioid PactA $6 Billion Settlement Threatens to Upend US Bankruptcy DealsSupreme Court Halts Purdue’s Opioid Pact, Will Hear Appeal

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