SCOTUS upends Purdue Pharma’s opioid deal — and bankruptcy law

by Noah Feldman

In a surprising twist to America’s ongoing opioid crisis, the Supreme Court has thrown out a legal settlement that would have paid billions of dollars to victims of over-prescription as well as all 50 state governments. Along the way, the court made it much harder than it has ever been before to settle large, complex mass tort cases with a bankruptcy agreement.

The court held that, while a bankrupt company like Purdue Pharma LP can be released from further liability under such a settlement, a bankruptcy settlement can’t release non-company parties like the Sackler family, the owners of Purdue, from future liability. That substantially removes the incentive of such parties to agree to a settlement — a problem likely to occur in many similar situations in the future.

The 5-4 decision deviated from the more familiar ideological breakdown: Liberal Justice Ketanji Brown Jackson provided the fifth vote for a majority opinion by arch-conservative Justice Neil Gorsuch, while the dissent by Justice Brett Kavanaugh was joined by his fellow moderate conservative Chief Justice John Roberts as well as liberal justices Elena Kagan and Sonia Sotomayor.

The best explanation for the vote breakdown is that the four justices in dissent are all pragmatists. Without releases for parties like the Sackler family, the bankruptcy system can’t resolve major mass tort cases. The five justices in the majority are all more formalistic or, in Jackson’s case, idealistic.

Gorsuch wrote that the text of the bankruptcy code doesn’t specifically allow the bankruptcy court to release parties like the Sacklers from future liability. The ruling leaves the Purdue case unsettled and would require a new law from Congress to fix both this situation and other future situations like it.

The legal issues in any major bankruptcy case are complicated, but the background and the basic issue before the court can be summarized with just a little oversimplification. Purdue, the maker of OxyContin, got into serious trouble in 2007 when one of its affiliate companies was convicted criminally for misrepresenting the drug as less addictive and susceptible to abuse than other opioids. That led to thousands of lawsuits, each seeking to hold the company — and potentially its owners, the Sackler family — civilly liable for the opioid epidemic in which some 247,000 people lost their lives from overdoses over 20 years.

As the lawsuits mounted, the Sackler family took about $11 billion out of the company, and then the company filed for bankruptcy. In the proposed settlement, Purdue’s creditors, including people and states that had damage claims against the company, were going to be paid the money that was still in the company plus another approximately $4.3 billion that the family agreed to put into the kitty.

It’s normal that in a bankruptcy settlement, the creditors can’t get any more money from the bankrupt company than the parties have agreed to. In order to sign on the dotted line, the Sacklers demanded the same protection for the family: They would pay the $4.3 billion and give up their company, but that was supposed to be it. Without such a guarantee, the Sacklers had little incentive to settle, because they could be sued in the future by other parties outside the bankruptcy agreement. All 50 state attorneys general had agreed to the deal, as did most, but not all of the individuals with damage claims against Purdue and the Sacklers.

Enter textualism, the theory of statutory interpretation that says all that matters is the words of the law. In this theory, the purpose of the law is irrelevant to its application and courts shouldn’t pay attention to the consequences of their rulings.

The rhetoric of Gorsuch’s opinion pointed to the implicit injustice of the Sackler family not ceding all the money it took out of Purdue before the bankruptcy. But the core of the opinion reasoned that the Sacklers, who have not themselves declared bankruptcy, cannot benefit from the guarantees a bankruptcy court can give because the Bankruptcy Act doesn’t say so. This was an exercise in textualism’s stubborn refusal to consider that the whole point of the law — here, bankruptcy law — is to help address real-world problems.

As it turns out, there is a paragraph in the bankruptcy statute that says a bankruptcy plan may “include any other appropriate provision not inconsistent with the applicable provisions” of the law. The US Court of Appeals for the Second Circuit thought this language was broad enough to cover the guarantee the Sacklers wanted.

And Kavanaugh’s dissent, which called the bankruptcy plan in this case “a shining example of the bankruptcy system at work,” agreed. The majority opinion, Kavanaugh went on, “makes little legal, practical, or economic sense.” That language is the hallmark of pragmatism, the idea that the best measure of law is whether it works in practice.

It’s noteworthy that Jackson cast the deciding vote to tip the scales in favor of Gorsuch’s opinion. Maybe she was influenced by the apparent injustice of the Sackler family not having to declare bankruptcy and staying rich, if not as rich as they were before. Jackson is not usually a textualist. But she is emerging as an idealist, one who thinks the court should do the right thing by her lights, not compromise in order to keep the wheels of the legal system spinning so the business can proceed as usual.

With her vote, the majority has now taken the bankruptcy system into uncharted territory with respect to resolving mass torts. The system may grind to a halt unless Congress steps in.

Noah Feldman is a Bloomberg Opinion columnist and a professor of law at Harvard University.