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The Litigation Fallacy: Making It Easier to Sue Doesn’t Necessarily Help Consumers

This article was originally published on October 13, 2016 in Morning Consult.

One of the troubling aspects of the current administration is its wholehearted embrace of regulatory and legislative approaches that promote private litigation as a means to a public policy end. Usually framed as attempts to make corporations more accountable to consumers, these mostly hurt consumers by increasing prices and hampering innovation.

Perhaps the most glaring example of this flawed approach is the Consumer Financial Protection Bureau’s intention to prohibit arbitration clauses on credit card contracts. These clauses in credit card contracts state that consumers must resolve contract disputes through arbitration rather than litigation. The CFPB wants to prohibit these agreements because it claims that allowing consumers only this form of redress gives credit card companies the upper hand.

While there is an honest and admirable desire to give consumers access to the best legal recourse in all situations, the current “best alternative” to arbitration clauses are class-action lawsuits, which contrary to popular belief do not lead to great rewards for consumers. According to one study, “in five of six cases where settlement distribution data was actually available, the percentage of class members who actually got money ranged from a high of 12% down to a low of 0.000006%.” Additionally, a Mercatus Center report shows that, contrary to the CFPB’s data, “for many and perhaps most class actions fewer [sic] than 10% of the class actually receive compensation.” Arbitration is also much faster, taking only several months, as opposed to the years of a typical class-action suit.

The real beneficiary of the CFPB’s proposal, which will likely go into effect next year, would be class-action attorneys, who are in line to earn millions of dollars unavailable to them through arbitration hearings — while class members themselves receive very little.

The CFPB is not alone in seeking to open the Pandora’s box of litigation. In a supposed attempt to improve affordability of certain prescription drugs, the Senate is considering passage of the CREATES Act. The bill’s bi-partisan sponsors claim it would keep the cost of prescription drugs down by making it easier for a certain class of generics to reach the market. But in fact, the bill would really be a wonder drug for trial attorneys, who stand to gain considerably from the opportunities for litigation that the bill creates.

Under current law, a company seeking to manufacture a generic version of a marketed drug that is in a high risk category has to apply to the company owning the patent for that drug so that they can run tests showing the generic version is bioequivalent to the original. To speed this process, the CREATES Act would grant generic manufacturers the ability to sue a brand-name company if it fails to provide “sufficient quantities of the covered product on commercially reasonable, market-based terms” within 31 days of receiving either the FDA’s authorization or the company’s request. While the intent of the legislation is to help “fast track” potentially lower cost generic drugs to market, in the end it will only serve to put lawyers’ interests above that of consumers and consumer safety.

First, the CREATES Act would compromise consumer safety. Certain drugs used to treat potentially life-threatening conditions are so potent, they pose serious health risks to others if not used properly. In the case of these kinds of drugs, some of which can only be used in a hospital or other controlled medical settings, the FDA requires strict protocols known as Risk Evaluation & Mitigation Strategies with Elements to Assure Safe Use (REMS with ETASU). Currently, if a generic manufacturer seeks to produce a prescription subject to these guidelines, it must first demonstrate that they can meet these required high safety standards. But under the CREATES Act, the rush to produce and get generic drugs to market faster could potentially lead, in some cases, to important safeguards being overlooked for the sake of expediency.

Last month, in a letter to Congress, the Patients Alliance for Drug Safety Protections, a patient advocacy group, expressed concern that under the CREATES Act, the “FDA would be precluded from investigating whether the generic developer has the safety track record and capability to follow a rigorous risk management system,” which in turn “could put patients at risk of significant harm.”

Second, the notion that this approach would lower costs is suspect. The companies behind these innovative pharmaceuticals spend significant time and financial resources to make sure they are effective and safe. If the serious threat of litigation doesn’t deter these companies from developing the drugs completely, the litigation and fines would raise the cost of production—and therefore the price consumers pay.

Finally, the act could in the long-term discourage companies from investing in cutting-edge innovation because the monetary damages posed by legal threats would outweigh the funding cost associated with research, development, and production. According to the Tufts Center for the Study of Drug Development, the cost to bring a new drug to market in 2016 was $2.6 Billion, up over 300% from 2003.

Whether we are talking financial services or, more importantly, healthcare, it is difficult enough for public policy to strike the right balance between rewarding innovation and maximizing competition. However, handing a giant litigation club to one side of that careful balance does not help consumers in the long run.

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