Insurers ordered to pay $62.7M for breach of duty to defend in heparin litigation

Under a supply agreement entered into in 2001, Scientific Protein Laboratories LLC ("SPL") supplied heparin products to Wyeth Pharmaceuticals, Inc. In 2004, Wyeth sold its heparin business to Baxter International Inc. and Baxter Healthcare Corporation (together, "Baxter") and SPL and Baxter agreed to an amended supply agreement.

Some, but not all, of the heparin active pharmaceutical ingredients ("API") supplied by SPL to Baxter originated in China. At the time, a subsidiary of SPL held rights in Changzhou SPL Co., Ltd. ("CZSPL" or the "Changzhou joint venture"), an entity created pursuant to a joint venture agreement between Changzhou Techpool Pharmaceutical Co., Ltd., a Chinese company, and a predecessor of SPL in 1999.

Raw materials from China

CZSPL obtained crude heparin from consolidators, which combined smaller lots of crude heparin into larger lots. The consolidators obtained the crude heparin from heparin workshops, which extracted the crude heparin from raw materials obtained from Chinese farms. From the crude heparin, CZSPL manufactured Heparin Sodium, USP, in China, which it sold to SPL and SPL resold to Baxter.

SPL also received crude heparin directly from consolidators and manufactured Heparin Sodium, USP, at a facility in Wisconsin, which it then sold to Baxter. Baxter finished the heparin and supplied it to hospitals, where the drug was administered to patients.

Severe patient reactions & deaths

Following reports of severe patient reactions to heparin, including patient deaths, Baxter and SPL recalled all of their U.S. heparin products between January and March 2008. Investigations concluded that the heparin had been contaminated by oversulfated chondroitin sulfate. The parties agreed that the contaminated heparin that had been administered to patients had been sourced through CZSPL.

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SPL sourced heparin from multiple suppliers, however, and supplied heparin to Baxter that had not been purchased from CZSPL. Some of the non-CZSPL heparin sold by SPL to Baxter also tested positive for contamination, but had not been administered to patients. The source of the contamination in the heparin SPL purchased from CZSPL was traced to the raw materials, which had been contaminated before they had been obtained by CZSPL.

1,064 lawsuits began in 2008

The first heparin lawsuits were filed in March 2008. In total, 574 federal lawsuits and 490 state lawsuits were filed against SPL, Baxter, or American Capital, Ltd., which, in 2006, had formed and acquired an interest in SPL Acquisition Corp., which acquired SPL Holdings, LLC, which wholly owned SPL.   

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Of the 1,064 suits referred to as the "heparin litigation," insurers calculated that American Capital was sued in approximately 68 percent and that only three percent of the heparin litigation suits were brought against Baxter without naming American Capital or SPL. Some of the suits named CZSPL as a defendant or alleged that the contaminated heparin a patient had received had been sourced through the Changzhou joint venture, but many of the complaints did not mention Changzhou or reference a joint venture.

Subsidiaries of Travelers

American Capital provided notice of the heparin litigation to Charter Oak Fire Insurance Company and Travelers Property Casualty Company of America, its commercial general liability and excess insurance carriers. Charter Oak and Travelers are subsidiaries of The Travelers Companies, Inc.

Shortly thereafter, the insurers decided that the heparin lawsuits fell outside the coverage of the policies, and filed a declaratory judgment action seeking rescission or reformation of the policies. American Capital and SPL filed a variety of counterclaims.

The parties moved for summary judgment.

Breach of duty under CGL & excess policies

The district court ruled that Charter Oak had breached its duty to defend American Capital in the heparin litigation under three CGL policies; Travelers had breached its duty to defend SPL in the heparin litigation under an excess policy; and Charter Oak had breached its duty to defend SPL in the heparin litigation under two CGL policies.

The district court then examined the claim for $62,717,069.00 in damages sought by American Capital and SPL.

The district court pointed out that American Capital and SPL had provided an exhibit tallying 894 invoices reflecting time recorded by attorneys in the law firms' recording mechanism from which the invoices were compiled and vendor invoices received from vendors and prepared in the ordinary course of business. These invoices, the district court decided, were "normal, routine billing records."

In the district court's opinion, these invoices provided "far more than a compilation of hours multiplied by hourly rates" and they enabled the insurers and the court to scrutinize the legal services provided in the defense of the heparin litigation to American Capital, SPL, and Baxter.

Reasonable & necessary litigation defense costs

The district court then ruled that, in light of the "complexity of the heparin litigation, the amount of time and labor involved over more than seven years, and the potential exposure the heparin defendants faced," the heparin litigation defense costs represented in the American Capital and SPL exhibit were "reasonable and necessary."

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The district court concluded that American Capital and SPL had incurred the heparin litigation expenses they sought to recover, that the claims against Baxter, SPL, and American Capital were "not only reasonably related but inextricably intertwined," and that American Capital and SPL were entitled to prejudgment interest under Maryland law of 5% per annum, accruing from the date of each invoice until the date of judgment.

Breach of contract damages

The district court then awarded breach of contract damages to American Capital and SPL in the amount of $62,717,069.00, plus prejudgment interest at 5% per annum from the date of each invoice until the entry of judgment, for the attorneys' fees and litigation expenses they had incurred to defend against the heparin litigation between January 18, 2009, and June 14, 2016.

The case is Charter Oak Fire Co. v. American Capital Ltd., No. DKC 09-0100 (D. Md. Aug. 3, 2017).

Steven A. Meyerowitz, Esq., is the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law Report, and the founder and president of Meyerowitz Communications Inc. Email him at smeyerowitz@meyerowitzcommunications.com.