JURIST Guest Columnist Tara Pakrouh, Widener University School of Law Class of 2015, discusses Merck & Co.’s $100 million settlement concerning the corporation’s NuvaRing contraceptive device, the board’s liability and the fiduciary duties it owes to its shareholders…

In a December 2000 email to his colleagues, the Director of US Reproductive Marketing for Organon Pharmaceuticals, asked, “What are the chances that this section can be removed altogether?” The question was in reference to a label on Organon Pharmaceutical’s product, NuvaRing, listing negative side effects. The primary side effect listed was the increased risk of venous thromboembolism (VTE), a condition marked by the formation of potentially deadly blood clots. The plaintiffs in a class action lawsuit against Merck & Co., which now owns NuvaRing, allege the pharmaceutical company intentionally concealed this and other negative — and potentially deadly — side effects of the contraceptive device. Although Merck denies fault, it offered a $100 million settlement that was rejected by the class comprised of women who have survived the contraceptive’s adverse side effects and families of the deceased. The class wants legal accountability for Merck and to have NuvaRing taken off the market. While the aforementioned injuries and deaths are tragic and may even result in Merck’s liability, this article will instead examine the board’s liability and the fiduciary duties it owes to its shareholders.

I. The Product Overview

In 2001, Organon brought to market and the Food and Drug Administration (FDA) approved a unique birth control product, NuvaRing. The vaginal ring is appealing to many women because it is a simple device used weekly as compared to a birth control pill taken daily. That same year, the FDA approved Ortho-McNeil Pharmaceutical’s Ortho Evra, the first birth control patch. Following its release, regulators found the patch exposed women to increased levels of estrogen. As a result, the FDA approved a product label in 2005 warning users that high levels of estrogen could lead to VTE. This label coincided with a drop in sales and prescriptions for Ortho Evra, while sales of NuvaRing, which had no such warning label, remained robust.

In 2007, Schering-Plough Corporation bought Organon, and shortly thereafter hundreds of lawsuits were brought against both companies for intentionally concealing the negative side effects of NuvaRing. In 2009, Merck merged with Schering-Plough and assumed all of its assets and liabilities. One commentator argued the merger was devised to position Merck to corner the birth control market and recoup financial losses from the expiration of several other of its lucrative patents.

NuvaRing has two active components [PDF] — progestin etonogestrel and estrogen ethinyl estradiol. A 2012 FDA report [PDF] indicates that continuous exposure to this combination of hormones — in NuvaRing’s case by osmosis through mucous membranes into the bloodstream — can yield increased levels of estrogen and up to a 56 percent greater risk of VTE compared to other combined hormonal contraceptives, especially for younger women. Another type of VTE: deep venous thrombosis (DVT) is the formation of a blood clot in a deep vein, usually in the leg or pelvic veins, that can dislodge — or embolize — and travel to the lungs, at which point it becomes a pulmonary embolism (PE) potentially causing asphyxiation and death. According to Johns Hopkins Medicine, “[in] the United States and the United Kingdom, VTEs kill more people than AIDS, breast cancer, prostate cancer and traffic accidents combined.”

Unlike the FDA’s response to studies involving the side effects of Yaz and Yasmine, two Bayer AG birth control pills, the FDA did not require that NuvaRing’s label reflect Dr. Øjvind Lidegaard’s findings: the combination of NuvaRing’s hormones can cause a spike in estrogen levels and a higher likelihood of VTE. Merck responded to the FDA study with its own clinical trials. Merck found no increased incidences of VTE among women using NuvaRing compared to those using other combined hormonal contraceptives.

II. Questionable Behavior

In one of Organon’s NuvaRing clinical trials, a young healthy woman developed a VTE. When filing for FDA approval, Organon inserted this outcome into the body of the voluminous application with other clinical results instead of placing it in the thirty-page executive summary or citing the incident in a footnote. The FDA requested that Organon include a statement in NuvaRing’s packaging insert mentioning the contraceptive might cause greater risk of VTE as compared to other contraceptives.

Organon’s director opposed the statement because it could have discouraged women from using the contraceptive and led to a decline in sales, as was the case with the Ortho Evra contraceptive patch. Since clinical trials are intended primarily to test efficacy, the FDA acquiesced to Organon but mandated language stating “unknown” risks of blood clots.

III. Corporate Implications

A corporation’s board of directors owes fiduciary duties to its shareholders. Shareholders can sue their board in a derivative suit for breach of those duties. For our purposes, those duties are care and good faith. A duty of care claim can be analyzed under a malfeasance standard or a nonfeasance standard, depending on which standard is brought by shareholders in the suit. The malfeasance standard requires the board to have made an affirmative business decision that was reckless or grossly negligent. The board’s decision is otherwise protected by the business judgment rule, a presumption that the board acted reasonably. Under this rule, courts accord deference to the board for the vast majority of its business decisions. Liability is difficult to prove under this standard, unless for example a memorandum or email indicates the board recognized a substantial and unjustifiable risk yet decided to act regardless. If shareholders can somehow show the board’s decision was reckless or grossly negligent, they must then show the decision caused harm to the corporation. These steps tend to insulate the board from shareholder liability.

At face value, the email from Organon’s director, in which he opposed any mention of VTE, could arguably amount to a reckless decision. Organon’s board knew that NuvaRing’s continuous delivery of progestin etonogestrel and estrogen ethinyl estradiol could cause VTE and possible death, facts which the board had attempted to bury. However, at that time there had only been one documented incident of VTE — and zero deaths — among young users in the clinical trials. The Organon board justifiably recognized the result as a slight risk. Merck’s board would have known through due diligence of this trial case of VTE as well as the two aforementioned studies that linked NuvaRing to greater risks of VTE. Merck responded with its own study, in which it found no link between NuvaRing and higher risk of VTE. Although perhaps less ideal than an independent study, Merck’s decision to perform its own study and publish its findings suggests the board did not make reckless decisions.

A duty of care claim under the nonfeasance standard alleges a board failed to act. Specifically, shareholders in the suit would have to show the qualified directors failed to establish a compliance system to prevent malfeasance, failed to monitor the corporation and remain informed and failed to attend board meetings. A court analyzing a duty of care claim under the nonfeasance standard defers to the board so long as the directors made a good faith effort to use a compliance system, regardless of any malfeasance that may have been perpetrated by lower level employees. In fact, Merck implemented a compliance system with oversight officers [PDF] as a result of its 2000 VIOXX>scandal. It is likely this claim against Merck would fail because the qualified board members implemented such a committee.

A duty of good faith claim requires the shareholders show that the directors intentionally disregarded their duties, violated the law, or had mal-intent to harm the corporation. Without stronger evidence of alleged fraudulent activity, Organon’s director’s email and the burying of the negative clinical trial outcome alone will likely not demonstrate intent required to meet the good faith claim because Merck’s directors adhered to their fiduciary duties and actively addressed the problem by conducting clinical studies.

IV. Moving Forward

Though the board may not suffer corporate legal consequences, Merck will likely require a re-branding strategy. In addition to what plaintiffs demand — clear and informed disclosures on the product label and the website — I would suggest Merck study British Petroleum’s marketing response to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Merck’s campaign should remind the public that the company invests in the well-being of its patients through an expansive health product line. Merck’s public relations campaign would ideally re-brand its corporate image as a steward of holistic health and wellness, ideals the corporation should also strive to live up to. Not every product liability can be traced back to the boardroom, but the board should seriously consider how it will respond if Merck is to regain public trust.

Tara Pakrouh holds a B.A. from Temple University in Communications. She is a staff editor for the Delaware Journal of Corporate Law. She has worked as a judicial extern for the Superior Court of Pennsylvania and is currently working as a law clerk at Pachtman Law Officers.

Suggested citation: Tara Pakrouh, “What are the chances that this section can be removed altogether?”: NuvaRing, Blood Clots, and Corporate Responsibility , JURIST – Dateline, Mar. 5, 2014, http://jurist.org/dateline/2014/03/tara-pakrouh-nuvaring-settlement.php.