Purdue’s bankruptcy deal shields Sackler family owners from future opioid liability

Members of the Sackler family who own Purdue Pharma will pay $4.5bn under a plan to settle the bankruptcy of the company that invented the powerful pain drug OxyContin. The high price comes with something in return: a shield against future financial liability in America’s deadly opioid epidemic. 

The proposed release turns on a feature of US bankruptcy law that can protect third parties from lawsuits even though they have not filed for bankruptcy themselves. Critics say the provision allows powerful actors to exploit the legal system to escape full accountability. 

Parties including two divisions of the US Department of Justice and Purdue’s home state of Connecticut have cried foul. But the deal appears likely to be approved by Robert Drain, a New York federal bankruptcy judge, in a court hearing scheduled to begin later this week. 

Purdue filed for bankruptcy protection in 2019 as it battled lawsuits from municipalities, states, individuals and others over its role in opioid overdoses that have killed nearly 500,000 people. The proposed settlement transfers Purdue’s assets to a newly created company that would develop opioid abuse treatments and manufacture drugs unrelated to pain relief. The Sacklers’ cash would fund “abatement trusts” to bankroll campaigns against the opioid crisis and to compensate victims. 

In return, the release would protect the company’s family owners from future civil lawsuits, even though they were not debtors in the bankruptcy proceeding. 

These concessions to so-called non-debtor third parties originated in the 1990s, when Congress passed legislation shielding insurers in the bankruptcy cases of industrial companies facing asbestos liability. 

But judges later began granting third-party releases more freely, in particular to private equity firms accused by creditors of stripping the assets of portfolio companies that had landed in bankruptcy court. 

Now, members of the Sackler family who own Purdue would receive similar protection — a prospect some find troubling. The US Trustee, a division of the DoJ, wrote in a recent bankruptcy court filing that “the Sackler family release violates the United States Constitution”, adding that the “Sackler family will be authorised to buy hundreds of individual discharges for their role in the opioid crisis without actually filing for bankruptcy relief and subjecting themselves to the same rules of transparency and creditor protections that every consumer and business debtor who files bankruptcy must follow”. 

As well, Audrey Strauss, the US attorney for the southern district of New York, submitted a letter to the bankruptcy court that said the release “violates due process”, depriving opioid victims of “their property rights”. William Tong, the state of Connecticut’s attorney-general who had sued Purdue and members of the Sackler family, complained the settlement would void his state’s sovereign “police power”. 

Judge Drain early in the Chapter 11 case temporarily halted lawsuits against the Sacklers in the hope that mediation would lead to a consensual settlement. Purdue believes that permanently releasing the Sacklers from liability is justified because it will help ensure that family members, along with the company, make substantial contributions to opioid victims. Purdue’s law firm, Davis Polk & Wardwell, warned of a “race to the courthouse” and “ruinous” litigation without a court-approved global settlement. 

Purdue said that the company’s bankruptcy reorganisation plan “enjoys the support of over 95 per cent of voting creditors, and nearly 97 per cent of state and local government creditors”, calling the level of support “unprecedented in scope”.

A spokesman for the Sackler family said: “The proposed resolution enjoys overwhelming support from governmental and private creditors and is an important step toward providing substantial resources for people and communities in need. The Sackler family hopes these funds will help achieve that goal.”

In a court filing, descendants of the late Mortimer Sackler said the families “would not and could not agree to make the contribution required to finance the plan” without the legal releases.

“The Sackler families firmly believe that, if litigation were to proceed to conclusion, they would ultimately be vindicated,” they wrote. “But the burden of defending that litigation would be unrelenting; the cost of defence would be enormous; and it is impossible to overstate the chaos that would ensue as 750 current plaintiffs and untold other future plaintiffs raced to beat each other to judgment.”

Even some critics of the Purdue bankruptcy process have made peace with the proposed resolution. Letitia James, New York state’s attorney-general, has said that the “Sackler family have used every delay tactic possible and misused the courts all in an effort to shield their misconduct”. 

Yet in July, New York and others signed on to an augmented settlement plan in which the Sacklers agreed to relinquish control of family foundations as well as not pursue any naming rights at cultural institutions. The Sackler name currently graces several prominent museums, including New York’s Metropolitan Museum of Art. 

“While this deal is not perfect, we are delivering $4.5bn into communities ravaged by opioids on an accelerated timetable,” James said when the deal was agreed.

One longtime bankruptcy adviser who has represented companies who have faced allegations of harming thousands of customers believes a global compromise that resolves civil lawsuits was still the best possible outcome. “If the creditors are not happy with the Sackler contributions they can hold out for more or deny them the pass by voting no,” the adviser said. 

Purdue has already paid out billions in the OxyContin scandal. Last autumn it agreed to plead guilty to three federal felony charges, including defrauding the United States, and to pay a $3.5bn criminal fine and $2bn in forfeiture. The company also agreed to pay $2.8bn to resolve its federal civil liability. Purdue had previously pleaded guilty in 2007 to federal charges of improperly marketing OxyContin. 

No member of the Sackler family has been criminally charged over OxyContin. The settlement pending before Judge Drain would not preclude the government from bringing criminal charges in the future. 

Documents released in conjunction with the company’s 2020 plea agreement said that between 2013 to 2018, several family members “approved an initiative that intensified marketing to high-volume prescribers and resulted in prescriptions of OxyContin that were unsafe, ineffective, and medically unnecessary”.

The relevant Sacklers in 2020 agreed to pay a federal civil fine of $225m alongside Purdue’s settlement with the DoJ.

Even as Sackler family members pay up billions, some contend that they are using the machinery of the justice system for their benefit as the bankruptcy approaches its conclusion. According to an analysis commissioned by Davis Polk, family members had taken $10.3bn out of Purdue in net cash distributions between 2008 and 2019. 

“Courts and cases must not only be fair, but seem fair, to the public. From that perspective, the Purdue Pharma bankruptcy has a public relations problem,” said Melissa Jacoby, a bankruptcy law professor at the University of North Carolina. 

Tong, the Connecticut attorney-general, believes the reorganisation of Purdue has been mistakenly conflated with the Sacklers facing the justice system. “The Sacklers poured gas on the opioid crisis. This outcome says powerful people in this world can get away with bad acts.”

In late-July Senator Elizabeth Warren and others in Congress introduced a bill to curb non-debtor releases, citing Purdue Pharma and bankruptcies such as the Boy Scouts of America and USA Gymnastics where they claimed that a “loophole” allowed wrongdoers to “escape personal accountability”. 

Documents disclosed by the DoJ last autumn indicate some Sacklers had been on notice for years that they faced a financial reckoning over Purdue’s opioid franchise.

In an email from 2007, David Sackler, who had been a board member of Purdue, wrote to family members recounting that an investment banker once told him: “Your family is already rich, the one thing you don’t want to do is become poor.”

He went on to write: “My thought is to lever up where we can, and try to generate some additional income. We may well need it . . . Even if we have to keep it in cash, it’s better to have the leverage now while we can get it than thinking it will be there for us when we get sued.”