Merck's got to keep fighting
Why, in the face of mounting losses, Merck's Vioxx defense still makes more sense than a mass settlement.
By John Simons, FORTUNE writer

NEW YORK (FORTUNE) - Merck's defense of Vioxx is beginning to look ugly - and costing the company millions in legal fees and punitive damages. But make no mistake, the company's fight-every-case strategy is still its only rational option.

Last Friday, a Texas jury slapped the nation's number-four drugmaker with a $32 million judgment, claiming Merck's withdrawn arthritis pain reliever caused a 71-year-old man's death by heart attack. (Under Texas laws capping punitive damages, the verdict will likely be reduced to a maximum of $7.75 million.)

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The Rio Grande City, Texas decision was a tough blow for Merck (Research). First off, the plaintiff in the case, Leonel Garza, was a septuagenarian, former smoker with a history of ailments, including previous heart attacks and triple bypass surgery.

More importantly, in all of its cases, Merck has tried to convince jurors that company officials were not aware that the drug caused heart attacks, and that studies have shown Vioxx could only cause harm if taken for more than 18 months. Garza took Vioxx for less than one month.

One reason for Merck to remain sanguine: Starr County, Texas, where the Garza trial took place, is one of the most plaintiff-friendly venues in the country. Merck says it plans to appeal the decision.

For those of you keeping score at home, Merck has some 11,500 more cases to fight. So far, the company has faced six plaintiffs (in five trails) and prevailed against three of them. They're playing .500 ball. My beloved Yankees aren't doing much better. But it's only April. Merck's season is in the early stages too.

In spite of some high-dollar jury awards, the company's general counsel, Ken Frazier says he's satisfied with the better-than-expected win-loss tally. Why? "The fact that Merck has won a single case at all proves that juries are able to separate issues and plaintiffs," says John Brenner, an attorney with McCarter and English in Newark, New Jersey.

That's important. The key question before juries is: Did Vioxx cause this particular plaintiff's heart attack? So far, some jurors show a willingness to hear both sides and eliminate plaintiffs who appear to have invalid claims.

That's exactly the kind of consideration Merck needs. Despite what they say, Merck's lawyers don't really intend to fight every one of these 11,000 cases. The company's current strategy is a temporary one.

Imagine the drugmaker, if you will, as a 90-pound weakling outnumbered in a bar-fight. It's to the company's advantage to roll its eyes, froth at the mouth, and claim it's just crazy enough to fight to the death. The posturing has purpose. Merck wants to limit its ultimate liability and dissuade plaintiffs with weak cases from joining the fray before the statute of limitations runs out (for most of the country) on October 1.

To most legal experts, it's the only legal strategy that makes sense. "What's the alternative?" asks Andrew Kaufman, a professor of law at Harvard University. "If you establish a settlement fund at this point, you're asking more people to file suit. A settlement in the absense of trials means inflated costs."

Ultimately, Merck will settle, most legal observers believe. For one, the cost of fighting all comers is costly too. And it's unclear how long investors will stand for it. Samuel Davis, a trial lawyer who represents plaintiffs in drug liability cases, estimates that Merck has spent roughly $70 million per case thus far—including legal fees and damages.

As of December 31, 2005, Merck had set aside $685 million for Vioxx's legal defense, according to company's annual report. But before it can settle, Merck needs to determine a clear pattern in the courts as jury decisions help define the types of plaintiffs who can take part in a settlement—and, it hopes, reduce the average award each plaintiff is due.

If shareholders don't start to get nervous, the only factor that might derail Merck's plan would be exasperated judges. "At some point courts are going to be clogged with these cases and judges will start to put pressure on Merck and the plaintiffs to settle these cases," says John Leubsdorf, professor of law at Rutgers Law School in Newark.

Notes Leubsdorf: "The only scenario in which they won't settle is if they win so much that all the plaintiffs go away." Based on the record so far, that isn't likely to happen.

Plugged In is a daily column by writers of FORTUNE magazine. Today's columnist, John Simons, can be reached at jsimons@fortunemail.com . Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.