Arent Fox files Motion to Dismiss Qui Tam/False Claims suit against Schering and Organon

[UPDATED — 07.10.08 @ 1 PM EDT: Well — that was abrupt — Yikes! Arent Fox just handed in its walking papers. . . .

UPDATED — 06.30.08 @ 10 AM EDT: Ed, over at Pharmalot, has linked, and amplified, this story! Cool!]

As I earlier noted it would, overnight, Arent Fox has filed substantive motions in US v. Organon, Inc. (Case No. 07-2690, US Dist. Ct. NJ), the Organon Qui Tam/False Claims litigation.

Much of what appears in the brief supporting the Arent Fox motion to dismiss treads rather pedestrian cobblestones — that is, it makes quite-standardized arguments against the suit being allowed to proceed — so, I’ll not address those. I’ll note, in passing, though that it does strike me as not particularly “helpful“, from a purely public relations point of view to use as a mainstay of one’s defense to a false claims act lawsuit, that — essentially — “everyone already knew” these allegedly bad acts had occured, so this particular relator — Dr. Jeffrey Feldstein, MD (a former Organon scientist) — should not now be allowed to make the same, or even similar, claims against Organon/Schering. [More on that bit, some other time.]

What I do want to cover, today, is a rather-sweeping suggestion that Schering might, in fact, not be a “successor in interest” (a magic legal term, that) to the Organon businesses it acquired on November 16, 2007. Arent Fox makes this argument part of its brief to have Schering, as a party, dismissed from the lawsuit. That may well prove to be an unwise choice, at least this early-on. Why?

Well, because that purported-defense throws a very-sensitive topic (in all the other pieces of litigation pending against Schering, via ENHANCE, for example) squarely on the table, at a fairly early-stage in this litigation. All the other plaintiffs’ counsels are about to get an entirely “free look” here, at some evidence that may turn out to be quite helpful in establishing Schering’s alleged-lack of clean hands in Enhance.

The topic briefed, at Section IV, pages 30 to 31, by Arent Fox, is the extent of any “due diligence reviews” — and precisely what was learned during such reviews, reviews conducted from very early 2007 through at least the end of October 2007 — by Schering (and its lawyers, and investment bankers) — as it prepared to acquire the Organon businesses.

Remember now that those preparations, by Schering’s own admissions, included raising over $3.8 billion of new Schering-Plough equity securities, in several registered public offerings, in August and September of 2007. All of the diligence discussed with the bankers, prior to, and during those offerings — offerings used to pay for the acquisition of those same Organon businesses — are now entirely fair game. Ouch! I bet Goldman, Sachs & Co., Banc of America Securities, JP Morgan Securities, Inc., Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated won’t be pleased to learn that their underwrtiers’ due diligence files are now — so early in the various contests — entirely fair game, for Dr. Feldstein’s lawyers. Yikes.

The crux of this basis for dismissal allows Dr. Feldstein’s lawyers to ask “exactly what did, and didn’t, Schering learn on diligence — from Organon?” The very fair next question — to test Schering’s veracity about its answers to that first line of questioning — would be to ask all of the above-named investment bankers “What were you told Schering knew about Organon, when you agreed to raise almost $4 billion to fund the purchase?” Wow.

Let’s read from Arent Fox’s brief, of last night, shall we? Yes, let’s:

. . . .Schering-Plough is not a proper party to this lawsuit because Relator has failed to set forth any allegations that Schering-Plough violated the FCA. In fact, Relator references the company in only three of the thirty-two paragraphs of the Amended Complaint, none of which asserts that Schering-Plough engaged in conduct defrauding the United States Government. See Am. Compl. ¶¶ 3, 25, 32. Unable to allege that Schering-Plough violated the FCA, Relator dubiously concludes that Schering-Plough is nonetheless a proper FCA defendant based on the bald assertion that “Schering acquired Organon and succeeded to its rights and liabilities.” Id. This statement, by itself, though fails to provide a sufficient basis for retaining Schering-Plough in this case.

In order to establish successor liability, a plaintiff must demonstrate that two conditions are satisfied: (1) that the successor had notice of the claim before the acquisition, and (2) that there is substantial continuity in the operation of the business before and after the sale. See United States ex rel. Fisher v. Network Software Assocs., 180 F. Supp. 2d 192, 195 (D.D.C. 2002). Accordingly, in order to survive a motion to dismiss, a plaintiff’s complaint must contain factual allegations in support of those two conditions.10 Id. at 196 (allowing successor liability claim to survive motion to dismiss only because plaintiff properly pled allegations in support of both conditions).

Here, Relator once again has failed to set forth any facts supporting his allegation that Schering-Plough has successor liability. . . .

Note that item one in the second to last paragraph “opens the door” to a counter-motion, by the plaintiff/relator, suggesting to the court that if it is required to prove successor in interest, as an affirmative element of its intitial pleading, then it should certainly be allowed immediate discovery on these issues — before the court rules on the Arent Fox-filed Schering motion to dismiss. Certainly, given the plethora of public pronouncements about the Organon acquisition, by Schering, and how integral it would be to Schering’s future plans and results, this line of argument seems dubious at best — and just opened a (procedural) can of worms for the other firms defending Schering in the shareholders’ derivative, general securities-fraud, consumer-fraud and ERISA-related pieces of would-be class action litigation. Oops.

Now — equal time, here — here is the plaintiff’s law firm’s last filing: