The Vioxx Settlement. What does it mean and what happens next?

The Vioxx settlement that was announced early on Friday the 9th of November was one of the best kept secrets in the legal community in recent memory. I was at dinner with several prominent mass tort attorneys on the evening the deal was leaked to the wire services and the blackberry's lit up like Christmas about 11:00 pm PST all over the restaurant. Basically this agreement was negotiated by a very small group of key attorney's and now there will come the selling job of getting those attorney's and their clients to agree to be part of the 85% that must sign on for the deal to be valid.

The best reporting on this comes from the Wall Street Journal, which has followed this story from the beginning and you can find a link to their page by clicking here. There is a mountain of reporting there that breaks down a lot of the numbers, facts and players so if you are a Vioxx claimant, trial lawyer or settlement professional that wants to know more, i'd start right there.

What i'd like to quickly review for you in this post is what I know and what I expect to happen over the next two months as this settlement progresses.

1. If your attorney says he knew about this settlement in advance chances are he isn't being totally honest. This was a VERY small group of mass tort attorneys who have a big block of cases and enough leverage to be able to convince Merck that they could get to the 85% number. The group of six I was having dinner with probably have 1800 cases between them and they had no clue about this settlement until it hit the wires that evening. In fact I am told that some of the attorneys who actually tried Vioxx cases to juries had no idea this deal was in the works, thats how closely guarded this negotiation was.

2. The 8% compensation figure for the attorney's who negotiated this deal is going to be a point of contention among the trial lawyers. That 8% comes off the top of the $4.85 billion, so it amounts to a $388 million payment to those firms for their work in developing the Vioxx case and the work yet to come to in getting enough lawyers and claimants on board to reach the 85% threshold. We are talking about some serious money for those firms on top of their typical contingency fee agreements on the cases they have in their firms.

3. The claims administrator that will be set up and the escrow agent that holds the money are going to have an unusually high degree of power on which cases get paid, how they get paid and what options there will be for plaintiffs. First, lets do  some quick math. If we have a $4.85 billion deal, and right off the bat $385 million is coming off the top to the steering committee, you are left with a $4.5 billion amount. Lets assume that the average fee deal in this, with expenses factored in, is going to run a net of about 38%. There are huge expenses built up by many of the firms and those come off the top prior to the fee calculation so it's going to take a real chunk out of the net funds available for claimants. So, for the sake of this illustration lets assume the fee and expense figure is conservatively going to be $1.7 billion off of the amount. That would bring the fund down to a net amount of $2.8 billion. A sizeable amount but lets remember, we have a documented number of Vioxx cardiac cases in the range of 29,000, as well as another 17,000 of stroke cases. The allocation in the agreement states that the split of the funds is roughly 82.5% for MI cases and 17.5% for IS cases, so each pool has it's own net figure to work from, however that pool is going to be starting at $2.8 billion. The claims administrator and special master will decide via an appeals and fact finding process which group someone falls into and then the value of their claim.

4. If the pool of funds is $2.8 billion then there will be approximately $2.31 billion for MI claims and $490 million for IS claims. Lets do the math again now. That means if you take the 29,000 MI cases ( myocardial Infarct ions) and divide it into the pool amount of $2.31 billion, the average case is going to NET about $79,655 per claim after fee's and expenses. If you then do the math on the IS cses ( Ischemic Cerebrovascular event) you get a figure of about $28,825 per claim. I'll let you add your own commentary as to the adequacy of these amounts in context of what juries were awarding at the trials that were successful. Lets just say, with out getting into all the numbers that the average verdict was well in excess of $3 million per case and leave it at that, with a 40% success rate at trial for those cases that were tried to a conclusion.  

5. If you are a structured settlement broker or settlement planner and you see the numbers in the previous section, $80,000 for each MI case and $29,000 for each IS case, how excited are you about being involved in structuring these claims? Lets do a little bit more math before we start "counting our money" in the settlement community on this "big windfall." As most people are aware, both private health insurers and governmental agencies have liens they place on civil litigation in order to recover their funds expended on behalf of an insured. In almost every single one of these cases there are going to be significant medical lien issues to be resolved, calculated and paid before the claimant can obtain their funds. The AVERAGE cost of the first 24 hours of emergency care in a heart attack or stroke is approximately $38,500 in most parts of the US, with the following years after care cost being an average of $14,000 according to Medicare statistics. The average cost of a stroke is approximately $48,237 according to the studies I found online, and if any of you live in major US cities you know these costs are probably on the low side. My point is that the average medical lien on a stroke is probably larger then the promised benefit out of this settlement, and the average cost for a heart attack is about 2/3rds of the net amount that will be paid to that class of claimants.

The chances are very good that by the time the 8% goes off the top, the considerable expenses are paid, the legal fees are disbursed and the medical liens resolved that we will be looking at in my estimation, average payments, in the best case scenarios of  about $50,000 for MI cases and $25,000 for IC cases in the Vioxx settlement.

6. Average amounts at settlement are never usually structured at the end of a case. As a settlement broker and planner with almost 30 years of experience I can safely say that using the numbers I've just calculated that the average claimant is going to have virtually zero interest in using a structured settlement to plan their award and future needs. If we can safely assume that in every settlement is going to have 30% allocated to cash by the recipient, then the net amounts to structure or invest in the Vioxx claims and settlements is going to be $35,000 to $17,500. With a typical commission of 3.5% to 4.0% per structured annuity, we are talking about a gross commission of anywhere between $700 to $1400 per case. Factor in travel, time, staff and administration and most settlement professionals would probably be writing these cases at a loss in most situations. Not exactly a bonanza for the settlement community is it? When you further factor in the geographic dispersal of all of the claimants, time pressure to obtain their funds as well as communication issues in explaining the benefits of a structured settlement I'd hazard a guess that only a very small portion of the total $4.85 billion is going to end up structured.

7. Structured legal fees might be the only area of real opportunity for settlement professionals to write meaningful amounts of business. While at first blush it is clear there is going to be some substantial money paid to the trial lawyers in this case, once again when you factor in the realities of how much money was spent marketing, administering and negotiating these cases the vast majority of firms nationwide are going to be "out of pocket" a great deal of money and are not in a position where they can defer money to future years using a fee structure. Most firms are partnerships, most partnerships require annual maximum payments to partners of net proceeds and as such are not geared to structure fees regardless of the tax benefits. It will be a small and select group of trial lawyers who will structure their fees on this case.

In summary, this is a brilliant deal for Merck and represents a bone being tossed to the trial lawyers who were hanging on by their finger nails in hopes of a bail out of their expenses and costs to date. The cost of litigating this has been almost $2 billion for Merck so far, with costs of $600 million per year minimum stretching into the future as long as this remained unresolved, not counting the value of settling or paying verdicts on each individual case. Neither side could long afford further litigation and in the case of Merck this clears the decks on their liability, pumps up their stock price and puts them back in the game if they want to acquire other drug companies or partners with a bolstered stock price and liability removed. I don't think i'm out of bounds saying that Merck probably got out of this situation at a discount of 20% to 25% of the true fair value of what these cases could have been worth. So yes, $4.85 billion is a big number but the true number if the trial lawyers could have held on financially would have probably been closer to $20 billion, or comparable to the value of the Phen Fen litigation and settlements.

I'm going to be very interested to see if they reach the 85% threshold.

I'm going to be very interested to see who the claims administrator and escrow agents are.

I'm not expecting any settlement professionals to make any meaningful money writing structured settlements on Vioxx cases.

Merck clearly won this battle and hopefully the trial lawyers go to school on this experience and begin to re-examine how they approach mass torts in the future. Now that the "bleed them white" tactic worked for Merck, we can expect to see it from other companies in the future.  


Posted on November 10, 2007 and filed under Vioxx litigation.