Opinion ID: 3059146
Heading Depth: 3
Heading Rank: 1

Heading: Dismissal of the NJCFA Claim

Text: The district court dismissed Southeast’s NJCFA claim, finding that Southeast had not adequately pled a causal connection between Bayer’s alleged fraudulent conduct and Southeast’s ascertainable loss. On appeal, Southeast contends that the complaint alleges a clear causal link between its loss and Bayer’s deceptive conduct -- that Southeast would not have paid for Trasylol at all, regardless of price, if Bayer had not suppressed the truth about this medication. Southeast additionally argues that the district court improperly characterized this allegation of a direct causal link as a fraud on the market theory. In response, Bayer maintains that Southeast failed to adequately plead a causal nexus because the complaint is devoid of allegations relating to how or why Southeast made the decision to pay for Trasylol and because Southeast’s alternative theories of causation amount to nothing more than a fraud on the market theory. 7 The NJCFA prohibits “[t]he act, use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise.” N.J. Stat. Ann. § 56:8-2. To state a claim under the NJCFA, “a plaintiff must allege each of three elements: (1) unlawful conduct by the defendants; (2) an ascertainable loss on the part of the plaintiff; and (3) a causal relationship between the defendants’ unlawful conduct and the plaintiff’s ascertainable loss.” N.J. Citizen Action v. Schering-Plough Corp., 842 A.2d 174, 176 (N.J. Super. Ct. App. Div. 2003) (citing Cox v. Sears Roebuck & Co., 647 A.2d 454 (N.J. 1994)). Unlike claims for common law fraud, the NJCFA “does not require proof that a consumer has actually relied on a prohibited act in order to recover.” Int’l Union of Operating Eng’rs Local No. 68 Welfare Fund v. Merck & Co., Inc. (Merck II), 929 A.2d 1076, 1087 (N.J. 2007). In lieu of this traditional reliance element, a NJCFA plaintiff must demonstrate that its ascertainable loss is “attributable to conduct made unlawful by the [NJCFA].” Thiedemann v. Mercedes-Benz USA, LLC, 872 A.2d 783, 791 (N.J. 2005) (citation omitted). In general, the causal nexus between a plaintiff’s ascertainable loss and the 8 unlawful conduct of a defendant may not be presumed in NJCFA claims. Weinberg v. Sprint Corp., 801 A.2d 281, 291 (N.J. 2002). Instead, “a private plaintiff must show that he or she suffered an ‘ascertainable loss . . . as a result’ of the unlawful conduct.” Meshinsky v. Nichols Yacht Sales, Inc., 541 A.2d 1063, 1067 (N.J. 1988) (citations omitted). In other fraud actions, however, elements similar to ascertainable loss and causal nexus may be presumed in certain circumstances. For example, the Supreme Court has adopted a presumption of reliance in the securities fraud context where the defendant disseminates a fraud to an efficient capital market. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008) (citing Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988)). This presumption of reliance, referred to as the “fraud on the market theory,” has been described as follows: The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . . The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations. Basic, 485 U.S. at 241-42 (quotation omitted). In this manner, evidence of a fraud disseminated to an open market creates a rebuttable presumption of reliance in the securities fraud context. Id. at 247. 9 In Merck II, the New Jersey Supreme Court addressed the propriety in NJCFA claims of using a fraud on the market theory to demonstrate ascertainable loss and proof of a causal nexus between the defendant’s acts and the claimed damages, stating: Fraud on the market is essentially a creature of federal securities litigation. In that context, plaintiffs who purchased securities are permitted to demonstrate that they were damaged simply because defendant engaged in behavior otherwise prohibited and there was a change in price. The theory therefore presumes reliance. We have rejected the fraud on the market theory as being inappropriate in any context other than federal securities fraud litigation. Therefore, to the extent that plaintiff seeks to prove only that the price charged for Vioxx was higher than it should have been as a result of defendant’s fraudulent marketing campaign, and seeks thereby to be relieved of the usual requirements that plaintiff prove an ascertainable loss, the theory must fail. Merck II, 929 A.2d at 1088 (internal citations omitted). The N.J. Citizen Action court also rejected a fraud on the market theory advanced by the plaintiffs in that case -- that the defendants’ misleading advertising inflated the price the plaintiffs paid for their products. 842 A.2d at 178. The court expressed similar concern that allowing a fraud on the market theory to satisfy the mandatory elements of ascertainable loss and causal nexus “would virtually eliminate the requirement that there be a connection between the misdeed complained of and the loss suffered. Adopting [a fraud on the market] theory would therefore fundamentally alter the concept of 10 causation in the [NJCFA] context.” 842 A.2d at 178. Thus, a fraud on the market theory is insufficient to establish either ascertainable loss or proximate causation in NJCFA claims. In the present case, the district court dismissed Southeast’s NJCFA claim, finding that Southeast failed to allege “a premise of proximate causation that is distinguishable from one that relies on a fraud-on-the-market analysis.” Specifically, the district court determined that “[t]here is no substantive difference between the question of whether [Southeast] would have paid for Trasylol at all instead of a lower-priced alternative versus whether Plaintiff paid too much for Trasylol because of the actual value of the drug.” Southeast, conceding that a fraud on the market theory may not be used to establish ascertainable loss or causation, argues that the district court mischaracterized its allegations by failing to recognize the distinction between paying too much for a drug and not paying for a drug at all.1 Southeast argues that in Merck 1 The Supreme Court has foreclosed Southeast from asserting a “fraud-on-the-FDA” theory of causation -- that is, that Southeast relied on FDA’s approval of Trasylol, which itself was the product of fraud. See Buckman Co. v. Plaintiffs’ Legal Comm., 531 U.S. 341, 348 (2001) (finding state law “fraud on the FDA” claims to be preempted by federal law). Southeast has also disclaimed a chain of causation that runs through the decisions of individual doctors, alleging in its second and third amended complaints that “physicians’ decisions to prescribe Trasylol were completely separate and distinct from the decision of [Southeast] and Class Members to pay for Trasylol. . . . Irrespective of the physician’s decision to prescribe Trasylol, an alternative drug or no drug at all, [Southeast] and Class Members had an independent choice whether or not to pay for Trasylol.” 11 II, the New Jersey Supreme Court tacitly endorsed a theory of causation for NJCFA claims whereby a third-party payor is permitted to state a causal nexus between the alleged fraudulent conduct and the payor’s ascertainable loss that is distinct from a fraud on the market theory, by simply asserting that absent the allegedly fraudulent conduct, a medication would not have been on the market. In International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck & Co., Inc. (Merck I), 894 A.2d 1136 (N.J. Super. Ct. App. Div. 2006), rev’d, 929 A.2d 1076 (N.J. 2007), the New Jersey appellate court certified a class of thirdparty payors who had paid for the drug Vioxx. 894 A.2d at 1153. The Merck I court found that the payors could establish a sufficient nexus between the alleged fraud and the ascertainable loss for purposes of a NJCFA claim by demonstrating, via expert proof, either that Merck’s scheme “allowed the company to achieve more favorable placement on the formularies than it otherwise might have,” or “that absent Merck’s misconduct, Vioxx would not have been on the market at all.” Id. at 1145. In Merck II, the New Jersey Supreme Court reversed the appellate court’s class certification, finding that the fraud on the market theory is “inappropriate in any context other than federal securities fraud litigation,” and “[t]herefore, to the extent that plaintiff seeks to prove only that the price charged for Vioxx was higher than it should have been as a result of defendant’s fraudulent marketing campaign, and seeks 12 thereby to be relieved of the usual requirements that plaintiff prove an ascertainable loss, the theory must fail.” Merck II, 929 A.2d at 1088 (citations omitted). However, the Merck II court did not specifically address the appellate court’s statement that a causal nexus between the alleged fraud and the ascertainable loss could be established by demonstrating “that absent Merck’s misconduct, Vioxx would not have been on the market at all.” Merck I, 894 A.2d at 1145. In the instant appeal, Southeast argues that by failing to address the lower court’s statement, the Merck II court tacitly endorsed this theory of causation. We disagree. A theory of causation relying solely on an allegation that the medication in question would not have been on the market absent the alleged fraudulent conduct is no more than a state law “fraud on the FDA” theory, a theory that has been specifically rejected by the Supreme Court. Buckman, 531 U.S. at 348. In Buckman, plaintiffs sought damages under state tort law, arguing that absent defendant’s fraudulent representations, the FDA would not have approved the orthopedic bone screws and the plaintiffs would not have been injured by these devices. Id. at 343-44. The Court dismissed plaintiffs’ state law “fraud on the FDA” claims, concluding that such claims are in “conflict with, and . . . therefore impliedly pre-empted by, federal law.” Id. at 348 (footnote omitted). The conflict was found to arise “from the fact that the federal statutory scheme amply empowers the FDA to punish and deter fraud 13 against the [FDA], and that this authority is used by the [FDA] to achieve a somewhat delicate balance of statutory objectives. The balance sought by the [FDA] can be skewed by allowing fraud-on-the-FDA claims under state tort law.” Id. Accordingly, the Merck II court could not have implicitly approved of a state law “fraud on the FDA” theory of causation for NJCFA claims whereby a third-party payor is permitted to state a causal nexus between the alleged fraudulent conduct and the payor’s ascertainable loss by simply asserting that absent the allegedly fraudulent conduct, the FDA would not have approved the medication to be on the market. Southeast additionally argues that the complaint sets forth a second, direct chain of causation that is also distinct from a fraud on the market theory, contending that (1) the plan documentation stating that Southeast would only pay for “medically necessary” expenses and (2) the FDA’s pronouncement that it could not identify any specific patient population for whom the benefits of using Trasylol outweigh the safety risks, establish a causal nexus between Bayer’s alleged fraudulent conduct and Southeast’s decision to pay for Trasylol. Such a theory of causation, supported by factual allegations connecting the alleged fraud to the implementation of the plan documentation, may be sufficient to allege a causal nexus in a hypothetical NJCFA claim. In the present case, however, the complaint fails to provide any factual allegations connecting the FDA’s pronouncement to Southeast’s determination of 14 medical necessity as a precondition to its payment. Even if Trasylol was in fact medically unnecessary and contraindicated for all uses, Southeast alleges no facts indicating how it would have independently evaluated Trasylol’s medical appropriateness, aside from relying on the intermediaries of prescribing physicians, the FDA, or the market. Reliance on the first of these intermediaries Southeast itself has disclaimed, while reliance on the second and third of these intermediaries is precluded by Buckman and Merck II, respectively. Thus, Southeast’s supposedly “direct chain of causation” is unsupported by factual allegations. On the facts alleged, the only causal nexus between the revelation of Trasylol’s true risk profile and Southest’s determination not to pay for Trasylol is merely a repackaged form of indirect causation -- relying either on the FDA’s approval decisions for Trasylol or a market capable of efficiently digesting the truth and relaying it to Southeast in the form of a market price. Contrary to Southeast’s suggestion, either theory of causation is far from direct, and foreclosed by the relevant case law. Finally, Southeast raises a novel theory of causation, arguing that Bayer’s alleged material omissions give rise to a presumption of causation. This argument was not raised below, and on that ground we may decline to address its merits on appeal. See Formby v. Farmers and Merchs. Bank, 904 F.2d 627, 634 (11th Cir. 1990) (“As a general rule, an appellate court will not consider a legal issue or theory 15 raised for the first time on appeal.” (quotation omitted)). Southeast contends that it raised this argument in a reply to Bayer’s motion to dismiss by stating that “payment for a product by someone exposed to misleading materials ‘would be sufficient to establish prima facie proof of causation,’” quoting Varacallo v. Mass. Mut. Life Ins. Co. (Varacallo), 752 A.2d 807, 817 (N.J. Super. Ct. App. Div. 2000). However, this argument was made in the context of explaining that a NJCFA claim requires proof of a causal nexus, not actual reliance. At no point did Southeast reference a presumption of causation arising from an allegation of an omission or otherwise acknowledge the discussion of this presumption in Varacallo.2 Accordingly, the argument is waived. See Four Seasons Hotels & Resorts, B.V. v. Consorcio Barr S.A., 377 F.3d 1164, 1169 (11th Cir. 2004) (finding an argument waived where nothing in the party’s brief to the district court “could have possibly alerted the district judge to the argument [made on appeal]”). Moreover, even if this argument had been raised below, it would have been to no avail. Southeast primarily depends on Varacallo to support its argument that Bayer’s alleged material omissions give rise to a presumption of causation. Such 2 Furthermore, pages 813 and 814 of the Varacallo opinion, cited in Southeast’s response to the motion to dismiss, discuss the proposition that common law fraud requires proof of reliance while NJCFA claims only require proof of a causal nexus between the concealment of the material fact and the loss. Varacallo, 752 A.2d at 813-14. In contrast, pages 817 and 818 of the Varacallo opinion, cited in Southeast’s reply brief, specifically discuss the presumption of causation arising from an allegation of an omission. Id. at 817-18. 16 dependence is ill-founded. The Varacallo court confronted a situation unlike the circumstances of the present case. There, the court addressed the following narrow question: “For purposes of certifying a class, must the plaintiffs offer direct proof that the entire class relied on defendant’s representation that omitted material facts, where the plaintiffs have established that the defendant withheld these material facts for the purpose of inducing the very action the plaintiffs pursued?” Varacallo, 752 A.2d at 817. In addition, Varacallo testified that he had read the alleged misstatements and relied upon them in deciding to purchase the policies at issue. Id. at 811. In contrast in the present case, the question is not whether Southeast must offer direct proof that the entire proposed class relied upon Bayer’s representations. Instead, the question is whether Southeast itself can establish a causal nexus between the alleged omission and its ascertainable loss. However, unlike the facts in Varacallo, the third amended complaint in the instant case is devoid of allegations that Southeast, or any other proposed class member, actually relied on Bayer’s representations. The allegations of Southeast’s complaint are therefore distinguishable from Varacallo and do not raise a presumption of causation. Accordingly, we affirm the district court’s dismissal of Southeast’s NJCFA claim.