Publisher Health

A federal judge on Thursday evening unraveled a painstakingly negotiated settlement between Purdue Pharma and thousands of state, local and tribal governments that had sued the maker of the prescription painkiller OxyContin for the company’s role in the opioid epidemic, saying that the plan was flawed in one critical area.

The judge, Colleen McMahon of the U.S. District Court for the Southern District of New York, said that the settlement, part of a restructuring plan for Purdue approved in September by a bankruptcy judge, should not go forward because it releases the company’s owners, members of the billionaire Sackler family, from liability in civil opioid-related cases.

Although the Sacklers did not file for personal bankruptcy protection, they had made immunization from opioid claims an absolute requirement in exchange for contributing payments amounting to $4.5 billion to the agreement.

But the bankruptcy code, Judge McMahon said, does not explicitly permit a judge to grant such releases, which she called “the great unsettled question.”

The Sacklers did not respond to requests for comment on Thursday evening.

Lawyers for a small group of states that had appealed the plan immediately hailed the ruling. “This is a seismic victory for justice and accountability that will re-open the deeply flawed Purdue bankruptcy and force the Sackler family to confront the pain and devastation they have caused,” said William Tong, the attorney general of Connecticut.

In recent months, members of Congress have proposed legislation called “The Sackler Act” to preclude owners from receiving such protections unless they file for bankruptcy themselves. But even if eventually passed, it is unlikely to become law in sufficient time to resolve the Purdue case.

In her ruling, Judge McMahon all but openly invited the U.S. Court of Appeals for the Second Circuit to weigh in. Various appellate courts disagree on the matter and, in her meticulous, 142-page assessment, Judge McMahon wrote that “the lower courts desperately need a clear answer.”

Within hours of the ruling, Purdue said it would appeal. Judge McMahon’s ruling “will delay, and perhaps end, the ability of creditors, communities, and individuals to receive billions in value to abate the opioid crisis,” said Steve Miller, chairman of the company’s board of directors. “These funds are needed now more than ever as overdose rates hit record-highs, and we are confident that we can successfully appeal this decision and deliver desperately needed funds to the communities and individuals suffering in the midst of this crisis.”

The fates of Purdue and the Sacklers have been perhaps the most closely watched among the web of litigation brought against companies in the pharmaceutical industry seeking to hold them accountable for the epidemic of opioid addiction in the United States, which has claimed more than a half-million lives.

Under the crush of thousands of lawsuits, Purdue filed for bankruptcy restructuring in September 2019, which automatically put a hold on all the claims against it.

Nearly two years later, Judge Robert Drain, the bankruptcy court judge in White Plains, N.Y., confirmed a plan that had been approved by a majority of creditors who voted. Purdue would be formally dissolved and would re-emerge as a new company called Knoa Pharma that would still produce OxyContin but also other drugs. The new company’s profits would go to states and communities to fund opioid treatment and prevention efforts.

The Sacklers would renounce their ownership, eventually sell their foreign pharmaceutical companies as well, and contribute $4.5 billion of their fortune to the state and local opioid abatement funds.

In exchange, all lawsuits against Purdue would be extinguished, a benefit typical of bankruptcy. What made the settlement so contentious was the Sacklers’ insistence on being released from all Purdue-related opioid claims, although they had not personally filed for bankruptcy.

In court, lawyers said there are more than 800 lawsuits that name the Sacklers.

After Judge Drain approved the plan, it was immediately appealed by the United States Trustee, a branch of the Justice Department that monitors bankruptcy cases; eight states, including Maryland, Washington and Connecticut; the District of Columbia; and about 2,000 individuals. The appeal was filed in federal district court.

Lawyers challenging the plan argued that the Sacklers had essentially gamed the bankruptcy system. Moreover, they argued, Judge Drain lacked the authority to shut off a state’s power to pursue the Sacklers under its own civil consumer protection laws.

“Today’s ruling is a critical development that restores the state’s ability to protect the safety of Marylanders by holding fully accountable those who created or contributed to the opioid crisis, particularly members of the Sackler family,” said Brian E. Frosh, the Maryland attorney general.

During oral arguments, Judge McMahon said she was troubled by what she saw as a red flag: the more than $10 billion that the Sacklers withdrew from Purdue between 2008 and 2018, as the opioid epidemic was cresting. The Sackler dividends were largely deposited in offshore accounts and trusts that are inaccessible to American authorities.

And notably, she said, the withdrawals escalated after Purdue and three top executives pleaded guilty in 2007 to federal criminal and civil charges related to aggressive marketing of opioids, paying more than $600 million.

As Judge McMahon wrote: “Concerned about how their personal financial situation might be affected, the family began what one member described as an ‘aggressive[]’ program of withdrawing money from Purdue almost as soon as the ink was dry on the 2007 papers.”

Those withdrawals left the company without deep cash reserves to resolve thousands of opioid lawsuits that, by late 2019, forced Purdue to seek shelter in bankruptcy. But to settle the lawsuits and emerge from bankruptcy, Purdue needed the Sacklers’ contribution.

That reliance put the Sacklers in a position to make a line-in-the-sand demand: They would only give the money if they received immunity from all opioid-related cases filed in civil courts.

Purdue and lawyers for creditors who approved the plan had argued that Judge Drain’s authority to grant such sweeping immunity was in fact grounded in the bankruptcy code, as well as in precedent from the Second Circuit, under whose jurisdiction the Purdue case falls. Without the Sackler contribution, the lawyers said, Purdue would likely be dissolved, leaving plaintiffs who are in sore need of resources largely uncompensated.

“There is no question that the Sacklers are bad actors,” wrote lawyers for an oversight committee of creditors that ultimately supported the settlement plan. But it was the knowledge of those acts, gleaned in a scorched-earth 18-month investigation of the family’s finances, they said, that gave the plaintiffs the leverage to extract such a large settlement sum from Purdue’s owners.

But lawyers for the U.S. Trustee argued that shutting down the ability of plaintiffs to sue the Sacklers violated the plaintiffs’ due process rights. The Sacklers, they argued, should not be rewarded for their contribution because they “created the need for that money” by taking it out of the company in the first place, setting up the situation where they would be protected from lawsuits “by piggybacking on the bankruptcy of their company.”

On Thursday night, after the ruling, Attorney General Merrick B. Garland said in a statement, “The bankruptcy court did not have the authority to deprive victims of the opioid crisis of their right to sue the Sackler family.”

In her opinion, Judge McMahon said that the case raised constitutional questions but that she did not need to reach them, having found no authority for a judge to grant immunity to parties who do not seek bankruptcy protection.

The Sackler lawyers argued that the withdrawals had not been done in anticipation of a bankruptcy filing that occurred years later, after family members had stepped down from the Purdue board. Instead, they said, the hefty withdrawals coincided with a decade in which a key patent issue was addressed in Purdue’s favor and the company was flush with cash.

During that same period, Purdue’s sales force continued to fan out across the country. The use and illegal diversion of prescription opioids skyrocketed.

When Purdue filed for bankruptcy, its relationship with its owners became strained — simultaneously cooperative and adversarial. The company relies on the Sacklers to fund settlements. Yet as the debtor, Purdue conducted a forensic accounting of all of its assets, including the billions withdrawn by the Sacklers.

A congressional committee found that the Sacklers are worth about $11 billion.

While the Purdue Pharma bankruptcy plan — and its disbursements to help prevention and addiction treatment — is on indefinite pause, wending its way through the courts, the opioid epidemic, indifferent to negotiation, persists. Last month, federal data showed that deaths from opioids — fentanyl, heroin and illegally diverted prescription painkillers — only continue to trend upward.