With an eventful 2023 in the rearview mirror, Reorg’s Americas Litigation, Regulatory and Legislative analyst desk compiled selected situations we are tracking closely this year.
Highlights include the continuing battle in the healthcare sector between payors, providers, drug companies and governments; liability management litigation; continued fallout from extreme-weather events; banking and crypto regulation; the legislative and regulatory response to the rise of artificial intelligence; and patent fights - all playing out during a presidential election year.
The Litigation, Regulatory and Legislative team publishes a special situations tracker every other week (available on the Reorg site
HERE) that organizes and summarizes the main events we are following. As of Jan. 11, the tracker covers 143 situations: 119 ongoing disputes in litigation, 12 regulatory proceedings and 12 involving pending legislation.
Liability Management Litigation
We expect fights over
creditor-on-creditor violence to continue spilling over into the state and federal courts this year as pending suits move past discovery, more deals close and more novel structures (including the
double-dip/pari-plus structures that became fashionable in late 2023) and
blocking protections are tested.
State and federal judges (other than former bankruptcy judge David R. Jones in the
Serta Simmons case) have generally viewed suits challenging uptier exchanges and voting manipulation favorably and allowed them to proceed to discovery and possible trial, and by mid-2024 some of these actions, including suits arising from deals by
Bombardier,
Mitel and
Incora/Wesco, could be decided on the merits, with the new
Robertshaw litigation on deck.
We are still waiting for the first double-dip challenge, but that should be coming in 2024 as well.
Medicare Drug Price Negotiation
Pharmaceutical companies and industry organizations will continue their fight against the Medicare Drug Price Negotiation program administered by the U.S. Department of Health and Human Services and Centers for Medicare and Medicaid Services. The program is
projected to save the federal government $100 billion in Medicare spending over the next decade. Summary judgment rulings in multiple federal cases are expected in the first half of 2024.
The
program is a key component of the Inflation Reduction Act, or IRA, passed in 2022. Under the program, CMS negotiates lower prices directly with drug manufacturers for prescription drugs covered under Part B or Part D plans that have no generic or biosimilar competition. HHS and CMS
announced the first 10 prescription drugs selected for the Medicare Drug Price Negotiation program in August 2023.
CMS will send
initial offers to each affected company by Feb. 1, and the negotiation process must conclude by Aug. 1.
According to HHS, the first batch of selected drugs account for nearly 20% of the spending on the Part D drug benefit. CMS will select additional batches in coming years.
Pharmaceutical companies, including AstraZeneca, Boehringer Ingelheim, Merck, Johnson & Johnson’s Janssen and Bristol Myers Squibb, with drugs on the initial list are challenging the law. Industry organizations, including the
U.S. Chamber of Commerce and the
Pharmaceutical Research and Manufacturers of America, or PhRMA, have also filed suits.
The Chamber of Commerce plaintiffs suffered a
setback in September, when U.S. District Judge Michael Newman denied both the chamber’s motion for a preliminary injunction against the program as well as the federal agencies’ motion to dismiss for lack of standing. The judge endorsed the
federal agencies’ view that the negotiation program does not impose unlawful price controls without due process or otherwise
violate drugmakers’ constitutional rights. Judge Newman agreed with the agencies that “participation in Medicare, no matter how vital it may be to a business model, is a completely voluntary choice,” and thus any price set by Medicare for designated drugs under the IRA cannot possibly be confiscatory, as
alleged by manufacturers.
Briefing on motions for summary judgment are ongoing in the cases, and a hearing in the AstraZeneca case is
scheduled for Jan. 31.
State Drug Price Control Laws
States have increasingly taken it upon themselves to
impose price controls on pharmaceuticals as costs skyrocket. In 2024, the U.S. Court of Appeals for the Federal Circuit will hear an
appeal of a district court
decision preliminarily enjoining the state of Minnesota from enforcing a sweeping law that penalizes drugmakers for “excessive” price increases on generic drugs sold in the state.
The law, which imposes liability on generic drugmakers for increases in the price of generic drugs sold in Minnesota, took effect on July 1, 2023. The Association for Accessible Medicines - a trade group of generic and biosimilar drug manufacturers, including Teva Pharmaceutical, Sun Pharmaceutical, Amneal Pharmaceutical and Dr. Reddy’s Laboratories - sued the state arguing that the law unconstitutionally regulates transactions that occur wholly outside of Minnesota.
On Dec. 4, a federal judge in Minnesota
granted a preliminary injunction preventing Minnesota from enforcing the law, holding that the drug manufacturers are likely to succeed on their claim that the law violates the U.S. Constitution. Minnesota Attorney General Keith Ellison appealed the ruling on Jan. 2.
The Florida Agency for Health Care Administration received approval on Jan. 5 for the state’s drug importation program from the U.S. Food and Drug Administration to
import certain prescription drugs from Canada.
Under the importation program, the state may import certain drugs from Canada if doing so will significantly reduce the cost to American consumers without imposing additional risks to public health and safety, according to the FDA. Florida is required to report quarterly to the FDA and ensure imported drugs are authentic and comply with federal regulations on the drugs’ specifications and labeling.
PhRMA has voiced strong concerns about Florida’s drug importation program and
warned that it may mount a legal challenge. Other states, including Colorado have asked the FDA for permission to import drugs as well.
Wildfire Litigation
Increasingly common extreme-weather events - especially wildfires and unexpected storms - will give rise to increasingly large and complex litigation. Litigation against Hawaiian Electric Industries across dozens of cases stemming from the August Lahaina fire that devastated Maui is set to gather pace throughout 2024. Wildfire victim plaintiffs and Hawaiian Electric are
arguing over whether such cases should be heard in state court or federal court, the latter being the company’s preferred venue.
Investigations from the Hawaii attorney general and the Maui Fire Department could shed more light on the exact nature of Hawaiian Electric’s role and responsibility for the fires. Hawaii Attorney General Anne Lopez late last year
said that her office expects to complete its first phase of the investigation early in 2024 and to conclude the overall investigation toward the end of 2024.
Wildfire relief will feature prominently in the upcoming session of the Hawaii State Legislature, which is set to
convene tomorrow, Wednesday, Jan. 17. Hawaii Gov. Josh Green recently submitted a
supplemental budget request to the State Legislature, which includes $452 million in additional funding to respond to the August wildfires. Last fall, Green
said that “all options will be considered, including securitization” for Hawaiian Electric to help finance the wider recovery effort.
Any securitization would likely involve the Hawaii Public Utilities Commission, or PUC. Separately, the PUC in December
granted Hawaiian Electric’s application to defer accounting treatment for wildfire costs. The company will need to file separate applications with the PUC to actually recover those deferred costs.
In Oregon, developments in the wildfire litigation against PacifiCorp stemming from the Oregon wildfires in 2024 could provide clues as to the merits of liability claims against Hawaiian Electric. Phase 2 trials against PacifiCorp are scheduled to take place this winter, after a jury
last year found the company liable for $90 million in damages to 17 class-action plaintiffs.
Airline Mergers & Regulation
The federal judge presiding over the U.S. Department of Justice’s
challenge to JetBlue’s pending $3.8 billion acquisition of Spirit Airlines is expected to issue a decision in the coming weeks. If the court blocks the merger, both JetBlue and Spirit face
tenuous stand-alone prospects given the fierce competition in the wider industry.
Court approval of the merger could transform the U.S. airline industry by creating the fifth-largest U.S. airline.
A court win for JetBlue and Spirit could also prompt a wave of airline consolidations and would be a boost to Alaska Airlines’ efforts to secure regulatory approval for its pending
acquisition of Hawaiian Airlines. Conversely, an injunction may chill consolidation and intensify the regulatory headwinds for the Alaska-Hawaiian deal.
Alaska Airlines and United are grappling with safety concerns surrounding their Boeing 737 MAX 9 aircraft after a
door plug malfunction occurred on an Alaska plane on Jan. 5. The Federal Aviation Administration ordered the planes to be grounded for inspections, resulting in the cancellation of hundreds of flights a day. Boeing and fuselage maker Spirit Aerosystems have been
cooperating with the FAA and the National Transportation Safety Board in their
investigations, which are in early stages and could last months, if not years.
Additional changes to airline regulation could come as Congress needs to negotiate a long-term bill reauthorizing the FAA after it recently passed a
stopgap extension until March.
Meanwhile, the Department of Transportation is
reportedly investigating deceptive practices by airline loyalty programs in response to
concerns raised by Sens. Richard Durbin, D-Ill., and Roger Marshall, R-Kan. The two senators have also been trying to advance a major bill that would crack down on credit card companies, the
Credit Card Competition Act.
Airlines have joined Visa and Mastercard in
opposing the bill, saying the legislation poses a serious threat to airline credit cards and reward programs. There are, however, doubts that the controversial legislation will be put to a final vote in both chambers given the wider dysfunction and turmoil on Capitol Hill.
Bank Regulations & Private Credit
Despite vocal protests from the
banking industry and
lawmakers from both political parties, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are expected to move forward with
higher capital requirements for large banks, known as the Basel III Endgame reforms. Additionally, the regulators are moving forward with less controversial
long-term debt requirements for large banks after the collapse of SVB, Signature Bank and First Republic Bank in 2023. Public comments on both proposals are
due today, Tuesday, Jan. 16.
While Federal Reserve Vice Chair for Supervision Michael Barr has championed the Basel III reforms, Federal Reserve Chairman Jerome Powell has
said regulators need to listen to industry participants in order to “strike the right balance” between improving financial stability and reducing access to credit. Meanwhile, the investigations into harassment at the FDIC
loom over FDIC Chairman Martin Gruenberg, another main advocate for the capital requirements.
Critics of the Basel III requirements say that the rules, if implemented, would shift more lending activity into the nonbank sector. Democratic lawmakers have
called for increased oversight of the $1.6 billion private credit industry.
Barr said on
Bloomberg’s “
Odd Lots” podcast last fall that regulators “need to pay attention to the nonbank sector, but we can't have a weaker bank system because of concerns about the nonbank sector” in defense of the Basel III reforms. The Financial Stability Oversight Council could potentially designate more nonbanks as systemically important and subject to the Fed’s supervision after the interagency panel
removed hurdles for such designation last fall.
SEC Rulemaking
This will be a make-or-break year for the Securities and Exchange Commission’s rulemaking agenda under Chair Gary Gensler, as the agency faces legal challenges to recently promulgated regulations and rushes to finalize new rulemakings ahead of the presidential election.
The SEC currently faces a
court challenge in the Court of Appeals for the Fifth Circuit over its
recently adopted rules requiring private fund advisors to provide quarterly statements and prohibiting preferential treatment to certain investors. Last year, a collection of industry groups sued to invalidate the regulations, asserting that they violate the Administrative Procedure Act, or APA. Oral argument is
scheduled for Feb. 5.
In a similar vein, the National Association of Private Fund Managers, Alternative Investment Management Association and Managed Funds Association in December filed a
challenge in the Fifth Circuit to invalidate two of the agency’s recently adopted rules requiring additional reporting and disclosures for short-selling activities and the associated practice of loaning securities.
Even if the Fifth Circuit remands these rules back to the SEC instead of invalidating them, a remand under a compressed time frame could force the agency back to square one. In October, the appeals court
found that the SEC’s rule on corporate stock buybacks violated the APA. The court gave the agency 30 days to make revisions to the rule. However, in December, the court
vacated the rule in its entirety after the SEC said it was unable to make the revisions in time.
Against this litigious backdrop, the SEC is planning on moving ahead with a slew of new regulations this year ahead of the election. The agency is finalizing its
climate-change-disclosure rule that would require public companies to make carbon-emission and climate-change-related risk disclosures. The SEC is also working on a regulation for
enhanced disclosures for ESG practices.
Additionally, the SEC is finalizing a
proposed regulation for open-end fund liquidity risk management programs and swing pricing. The Loan Syndications and Trading Association
warned that certain aspects of the proposed rule could cause “market disruption and fire sales in the loan market.”
The SEC is also promulgating rules for
cybersecurity risk management for advisors and business development companies,
best execution,
order competition, and
minimum pricing requirements. The agency is also finalizing a rule for
safeguarding advisory client assets, which has drawn the ire of cryptocurrency companies like Coinbase.
Cryptocurrency Regulation
Cryptocurrency companies will continue to be scrutinized by the SEC as the agency moves forward with its “regulation by enforcement” approach despite the agency
approving 11 spot bitcoin exchange traded funds, or ETFs, on Wednesday, Jan. 10. In a
statement accompanying the bitcoin ETF approvals, Gensler reiterated the SEC’s stance that “the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.”
The debate over whether most crypto assets are securities and thus under the purview of the SEC or instead commodities and subject to oversight by the Commodity Futures Trading Commission will continue well into 2024.
The SEC’s
civil enforcement action against Coinbase centers on whether tokens traded on Coinbase’s platform are crypto asset securities. Coinbase insists they are not. Oral argument on Coinbase’s
motion to dismiss is
scheduled for Jan. 17.
Additionally, Coinbase last December
filed a petition in the U.S. Court of Appeals for the Third Circuit challenging the SEC’s denial of the company’s 2022 petition for comprehensive regulations tailored to the cryptocurrency industry.
The SEC is still pursuing its
civil enforcement action against crypto trading platform Binance.US despite Binance and former CEO Changpeng Zhao reaching a
$4 billion settlement over criminal charges last fall with the DOJ and Treasury. A hearing on Binance.US' motions to dismiss is
scheduled for Friday, Jan. 19
The SEC also
filed a
complaint against cryptocurrency exchange Kraken in November, accusing the company of operating as an unregistered securities broker, dealer, exchange and clearing agency.
In 2023 the House Financial Services and Agricultural Committees advanced the Financial Innovation and Technology for the 21st Century Act, or
FIT Act, which proposes exclusive jurisdiction by the CFTC over digital commodities and limits the SEC’s jurisdiction over digital assets to those offered as part of investment contracts. In the Senate, the Responsible Financial Innovation Act, or
RFIA, introduced in July would require cryptocurrency exchanges to register with the CFTC and would narrow the jurisdiction of the SEC.
These comprehensive bills face significant hurdles including from Senate Banking Committee Chair Sherrod Brown, D-Ohio, who views such bills as too friendly to the crypto industry. Narrower legislation - such as addressing
stablecoins and enhancing
anti-money-laundering protocols for the crypto industry - seems more attainable in 2024.
Pending Mass Tort Litigations
Several large multidistrict litigations, or MDLs, representing significant liabilities will continue to shadow blue-chip companies such as Johnson & Johnson, Bayer and 3M.
In December, the U.S. Judicial Panel on Multidistrict Litigation, or JPML,
established an MDL to consolidate claims against Johnson & Johnson, Bayer, Procter & Gamble and other drug manufacturers after an FDA advisory panel determined that oral phenylephrine products, such as the manufacturers’ well-known over-the-counter nasal decongestants, are ineffective. The
JPML order also highlighted store-brand nasal decongestants offered by Amazon, Walmart, CVS and other retailers. One of the
recently transferred suits asserts that “nearly $1.8 billion” of phenylephrine decongestants were sold in 2022.
Since its 2018 acquisition of Roundup manufacturer Monsanto, Bayer has been embroiled in nationwide litigation relating to the weedkiller’s alleged toxicity. Although Bayer has won most of its cases thus far - opting to settle those with stronger claims - three unfavorable
jury rulings in October and November placed the company on the hook for more than $2 billion in damages. With about 50,000 claims still pending - 4,000 of which reside in an MDL - the litigation now represents an “existential threat” to the company, according to one of the plaintiffs’ lawyers. Bayer shareholders have consequently begun to
urge the company to change its legal strategy, while CEO Bill Anderson has contemplated a potential breakup.
The public water system plaintiffs in the per- and polyfluoroalkyl substances, or PFAS, MDL
sought final approval for 3M’s proposed $12.5 billion settlement in December after asking for final approval of a
similar $1.185 billion settlement from DuPont a month before. The plaintiffs allege that 3M, DuPont and other manufacturers jeopardized public health nationwide through the irresponsible manufacture of PFAS substances. Neither settlement addresses personal-injury claims brought against the defendants or the public nuisance suits filed by dozens of state attorneys general. The presiding judge remarked in July that the settlements are “just a small piece” of the larger PFAS litigation. A final fairness hearing on the 3M settlement is scheduled for Feb. 2.
Last month, Johnson & Johnson
filed a motion to remove a leading plaintiffs’ firm from the MDL concerning its allegedly hazardous talc products. The company accuses Andrew Birchfield, one of the firm’s partners, of coordinating with former J&J attorney James Conlan to undermine the company’s attempts to resolve the mass tort litigation via bankruptcy by means of the “Texas two-step” strategy. Shortly after the bankruptcy petition of J&J subsidiary LTL Management was
denied for a second time in July, the company rejected a $19 billion settlement proposed by the plaintiffs, which it now alleges was crafted while Conlan and Birchfield were in communication. Oral arguments on the motion to remove are scheduled for Feb. 7.
Parties in the generic pharmaceuticals antitrust MDL - which concerns allegations of price-fixing brought against pharmaceutical manufacturers Teva, Sandoz, Aurobindo and others - are currently debating where the MDL’s first bellwether trial ought to occur. While the manufacturer-defendants
advocate for the first case to be held in Pennsylvania, where the MDL is currently located, the plaintiffs, led by various state attorneys general, hope to
return their cases to Connecticut. In August, Teva entered into a $225 million
settlement to resolve DOJ criminal price-fixing charges.
Antitrust Scrutiny of Rollups
We expect pressure on private equity backed healthcare providers that have pursued “rollup” strategies to continue in 2024.
The Federal Trade Commission’s ongoing
antitrust challenge to U.S. Anesthesia Partners and private equity sponsor Welsh Carson Anderson & Stowe’s alleged “multi-year anticompetitive scheme” consolidating anesthesiology practices in Texas is one of the latest lawsuits cutting to the heart of private equity healthcare provider rollup strategies.
The FTC’s suit joins others in this litigious space. Last April, two UnitedHealthcare entities
sued Starr Investment and New Enterprise-sponsored Radiology Partners in the California District Court alleging that the company defrauded UHC out of “tens of millions of dollars” via an unlawful “pass-through billing” scheme. Emergency provider groups owned by Blackstone-sponsored TeamHealth have
brought at least nine underpayment suits against UHC.
The FTC and DOJ’s December 2023
Merger Guidelines, which guide the agencies’ investigatory efforts, also seek to curb rollups that might ultimately violate antitrust laws even if individual acquisitions are not seen as problematic, signaling that scrutiny of these types of companies will continue.
Artificial Intelligence
As 2024 unfolds, high-profile legal challenges will highlight the interplay between technological innovation, copyright law and the broader ethical and regulatory issues shaping the future of AI.
The New York Times alleges in a December 2023
lawsuit against OpenAI and Microsoft that the technology companies unlawfully used copyrighted content to train their AI models. The suit, filed in a Manhattan federal court, claims that millions of
New York Times articles were used without consent.
The legal battle reflects growing concerns among publishers about how proprietary content may be used by technology companies to strengthen AI models and holds implications for other media organizations.
In response, OpenAI
maintains they “collaborate with news organizations and are creating new opportunities,” also noting that “early partnerships with the
Associated Press,
Axel Springer,
American Journalism Project and
NYU offer a glimpse into our approach.”
The future of AI regulation is uncertain, and legislative efforts are likely to face significant challenges. The Biden Administration’s October 2023
Executive Order on Safe, Secure and Trustworthy Development and Use of Artificial Intelligence outlines principles and priorities for AI and highlights the role of the federal government in managing risks as technologies continue to develop.
The White House last October also
released a Blueprint for an AI Bill of Rights that provides a framework that policymakers may use to “help develop specific guidance on the use of automated systems.” The blueprint notes that AI poses “great challenges” to democracy in ways that “threaten the rights of the American public.”
Senate Majority Leader Chuck Schumer, D-N.Y., called for an “all-hands-on-deck effort” to address AI via bipartisan legislation according to the
SAFE Innovation Framework. The framework aims to safeguard national security, ensure accountability, preserve democratic values and facilitate transparent communication between AI developers and the federal government.
Sens. John Thune, R-S.D., and Amy Klobuchar, D-Minn., led their Commerce Committee colleagues in introducing a bipartisan AI
bill in November 2023 to encourage innovation and increase transparency. The legislation aims to strike a balance between reining in the AI sector and defining effective risk-management assessment protocols. House Energy and Commerce Chair Cathy McMorris Rodgers, R-Wash., has
called for legislation that focuses on data privacy and security for AI.
Xifaxan Patent Litigation
Pharmaceutical companies are coming under increasing pressure to protect their patent portfolios as record profits encourage competitors to test the limits of protections for existing blockbuster drugs. Bausch Health Cos. subsidiary Salix Pharmaceuticals will continue to defend its monopoly on Xifaxan on multiple fronts in 2024.
Norwich Pharmaceuticals is pursuing a reversal of a lower court
judgment prohibiting the U.S. Food and Drug Administration from approving the company’s generic competitor to Salix’s Xifaxan until 2029 in two forums.
In August 2022, a judge in the District of Delaware ruled that Norwich’s original abbreviated new drug application, or ANDA, infringed on Salix’s patent on the hepatic encephalopathy, or HE, indication for Xifaxan and prohibited the FDA from approving Norwich’s ANDA until the patent expires in October 2029.
Norwich filed an amended ANDA excluding the infringing HE indication and requested that the district court modify its final judgment to allow the FDA to approve the amended application, but the court
denied that request in May 2023. Both parties
appealed the ruling to the U.S. Court of Appeals for the Federal Circuit.
On Jan. 8, the parties
presented oral arguments to a three-judge panel of the Federal Circuit. The court will likely issue an opinion in the first half of 2024.
Norwich in June 2023 also
sued the FDA directly in a District of Columbia federal court, requesting a preliminary injunction ordering the agency to approve the company’s amended ANDA. The District of Columbia court
denied Norwich’s request, holding that the FDA did not err in adhering to the Delaware court’s judgment. Norwich
appealed the decision to the U.S. Court of Appeals for the District of Columbia Circuit on Dec. 29, 2023.
The DC Circuit has not yet set a briefing schedule for the appeal.
Salix also faces an unrelated challenge from a subsidiary of pharmaceutical services company Curia Global. In August 2023, Curia IP Holdings
sued Salix for patent infringement, alleging that Xifaxan products sold after 2015 contain polymorphs of the rifaximin molecule that infringe Curia’s patents. The case is still in early stages but will likely progress to motions on the pleadings in early 2024.
Government Funding & 2024 Election
Similar to last fall, fights over funding the federal government are likely to consume most of Congress’ time and energy during the first quarter. Lawmakers are running up against a Friday, Jan. 19, funding deadline for four of the 12 appropriations bills. The remainder of federal spending expires on Feb. 2.
Over the weekend, Senate Majority Leader Schumer and Speaker of the House Mike Johnson, R-La.,
released a
stopgap spending bill that would fund the government until early March - potentially giving lawmakers additional time to reach a final agreement over FY 2024 funding levels. The Senate and the House are slated to vote on the stopgap bill later this week.
A shutdown at some point is still possible. Speaker Johnson has received backlash from the House Republican caucus over his deal with Schumer. Even if Johnson is successful in avoiding a shutdown, his standing among House Republicans could become increasingly tenuous.
While a brief shutdown would likely pose minimal disruptions, a prolonged reduction in federal agency operations threatens to disrupt active litigation matters involving the federal government, bankruptcy proceedings as well as other regulatory matters covered by Reorg.
Legislative activity will likely slow to a halt in the latter half of 2024 as lawmakers enter the fever pitch of election season.
The re-election of President Joe Biden, or another Democrat, would likely mean another four years of aggressive antitrust enforcement from the FTC and DOJ, stiff energy regulations and an active Environmental Protection Agency. The SEC would likely continue its efforts to crack down on cryptocurrency companies as well as promulgate new rules for the wider investment community. Banking regulators including the Federal Reserve, the FDIC and OCC would likely continue their path of increased regulation and would maintain any newly imposed capital requirements.
Democrats would also be able to preserve their legislative achievements of the past four years including the Medicare Drug Price Negotiation program and clean energy provisions enacted through the Inflation Reduction Act of 2022. The Biden administration will also continue efforts to implement its
rulemaking agenda throughout 2024.
A victory for former President Donald Trump, or another Republican candidate, would likely entail a significant rollback of regulations and policies in merger enforcement, energy policy, environmental regulations, cryptocurrency regulation, SEC rulemaking and banking regulations. Key provisions of the Inflation Reduction Act would also likely be targeted.
Trump in recent weeks has also revived the idea of replacing the Affordable Care Act, or “Obamacare,” which, if successful, threatens huge disruptions to the healthcare industry. Republican think tanks have already prepared a
comprehensive playbook detailing plans for every federal agency should Trump or another Republican win the White House.