King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp. (3rd Cir. 2015)

By Kevin E. Noonan --

Ever since the Supreme Court's decision in FTC v. Actavis in 2013, courts (predominantly district courts) have grappled with the scope of the decision.  It was evident that the presence of a large cash payment from the innovator (branded) drug company to the generic challenger as part of a "reverse payment" settlement agreement in ANDA litigation was enough to provoke a "rule of reason" antitrust analysis according to the rubrics set forth in Justice Breyer's opinion.  The more difficult question was whether other forms of consideration could lead to the same result.  A specific type of such "other" compensation from branded plaintiff to generic defendant was a promise by the branded drug maker not to market a so-called "authorized generic" form of the branded drug (i.e., a generic form of the drug marketed by the branded company), especially during the 180-day exclusivity period that a successful generic challenger received for being the "first filer" of an ANDA.  District courts have split on the issue, as shown in this non-exhaustive list:

• In re Nexium (Esomeprazole) Antitrust Litig., 968 F. Supp. 2d 367 (D. Mass. 2013) (no authorized generic; mixed decision on state law)

• In re Wellbutrin XL Antitrust Litig., No. 08cv-2431, DKT No. 534 (E.D. Pa. Jan. 17, 2014) (no authorized generic triggered rule of reason analysis)

• In re Lipitor Antitrust Litigation, 2014 WL 282755 (D.N.J. Jan. 24, 2014) (not limited to cash payments but rather the total value of whatever is transferred from the brand to the generic) (see "Judge Sheridan Dismisses More Plaintiffs in Lipitor Antitrust Case")

• In re Loestrin 24 FE Antitrust Litig., MDL No. 13-2472-S, DKT No. 116 (D.R.I. Sept. 4, 2014) (money means money)

• In re Niapsan Antitrust Litigation, 2014 U.S. Dist. LEXIS 124818 (E.D. Pa. Sept. 5, 2014) (monetary terms not required)

• In re Lipitor Antitrust Litigation, 3:12-cv-02389 (PGS) (Sept 12, 2014) (antitrust allegations dismissed on the pleadings)

• In re Effexor Antitrust Litigation, 11:5479 (PGS) (Oct. 6, 2014) (accord with Lipitor decision)

And in the District Court decision here (In re Lamictal Direct Purchaser Antitrust Litig. 18 F. Supp. 3d 560, 561 (D.N.J. 2014), the Court held that the Actavis decision was limited to instances where there was a cash payment from the brand company to the generic challenger.

A more definitive answer (for now) comes from the Third Circuit's decision issued last Friday in the appeal from the Lamictal case.  And the answer is that Actavis is not limited to reverse payment settlement agreements having a cash transfer to the generic, but can also include other types of consideration, in particular a promise from the brand not to market an authorized generic during the 180-day exclusivity period (see opinion).

The Court's rationale (from a panel having no members in common with the panel that decided the K-Dur appeal that prompted Supreme Court review of reverse payment settlement agreements) illustrates the consequences of Justice Breyer's opinion.  The case involved Teva's generic versions of Glaxo-SmithKline's (GSK) Lamictal® (lamotrigine) drug for epilepsy and bipolar disorder; the patent on the drug expired in 2008.  The court considered the antitrust question in view of an earlier (January 2005) decision that claim 1 of the patent was invalid as anticipated by prior art.  The settlement agreement contained three provisions where, in exchange for settling ANDA litigation asserting challenges to GSK's patents, Teva would be allowed to market generic lamotrigine chewables (an annual $50 million market), 37 months before patent expiry and tablets (an annual $2 billion market), at the end of the patent's term.  (The difference in the times of entry and the sizes of the markets played a role in the Court rejecting the argument that the agreement was precompetitive due to early market entry of the generic drug.)  In particular, the agreement contained a provision that Teva's generic tablets and chewables would not face competition from GSK's own "authorized generic."  Plaintiffs here are a class of "direct purchasers" (i.e., wholesale drug sellers).

The Third Circuit panel vacated the District Court's grant of a motion to dismiss for failure to state a claim under Fed. R. Civ. Pro. 12(b)(6) and remanded.  The Court rejected the argument that the Actavis decision should be limited to cash payments.  Rather, the Court considered the benefit to generic challenger Teva arising from branded drug maker Glaxo SmithKline's agreement not to market an "authorized generic" version of lamotrigine during Teva's 180-day exclusivity period as part of a settlement agreement ending ANDA litigation between the companies.  In making this determination the Court recognized that although there was no frank money payment from GSK to Teva, the complaint recited sufficient allegations that the Court should apply the "rule of reason" to plaintiffs' challenge to the agreement for violating Sections 1 and 2 of the Sherman Act.  Important in its analysis was that GSK would be permitting Teva to be the sole generic entering a $2 billion market for Lamictal® capsules and that the value to Teva was "an unexplained large transfer of value from the patent holder to the alleged infringer" that implicated the rationale provided by the Supreme Court in its Actavis decision for subjecting the agreement to antitrust scrutiny under the rule of reason.

The Court specifically held that the "no-authorized generic" portion of the agreement "may represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition" which were the types of agreements (albeit in the context of cash payments) that Actavis held were subject to antitrust scrutiny.

The Court's prejudices (consistent with the general anti-patent consensus that has arisen in this century) are reflected in how the Court begins it analysis, stating that patents are "the exception to the general rule against monopolies" and that "Patent Clause itself reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the 'Progress of Science and useful Arts,'" citing Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 146 (1989) (perhaps the first instance of the Court enunciating Justice Breyer's "Goldilocks" view of this need for balance in patenting).  (It is illustrative that the Court cites in support of this balancing idea a passage from Areeda and Hovencamp's treatise, Antitrust Law, that states "Patent law . . . serves the interests of consumers by protecting invention against prompt imitation in order to encourage more innovation than would otherwise occur.")  And the panel cited Justice Breyer's Actavis decision, specifically the cases cited therein (and rebutted by the Chief Justice in his dissent) to support these prejudices.

The panel also recognizes that the Court identified reverse payment settlement agreements to be outside the norm because the included large cash settlements from the patentee to the accused infringer (hence the term "reverse payment") and that such settlement terms were extremely unusual and uncommon outside ANDA litigation.  Nevertheless, the panel held that "no authorized generic" agreements could fall within the province of the "five sets of considerations" set forth in Justice Breyer's opinion depending on the value to the generic challenger in having the branded drug maker forswear from marketing its own generic version of a branded drug.  Here, the Court reasoned:

It seems to us that no-AG agreements are likely to present the same types of problems as reverse payments of cash.  The no-AG agreement here may be of great monetary value to Teva as the first-filing generic.  In Actavis, the Supreme Court recognized generally that the 180-day exclusivity period is "possibly 'worth several hundred million dollars,'" and may be where the bulk of the first-filer's profits lie.

Citing "evidence" from amicus briefs, the Court then states that:

There are also plausible indicia that this pattern held true here: the Amici States point out that "[p]ublic records show that generic sales of Lamictal in 2008 were some 671 million dollars," so the no-AG agreement "was clearly worth millions of dollars, if not hundreds of millions of dollars[,] to the generic."

The FTC also weighed in (to the extent that whatever expertise the Commission has provided support for the Court's opinion), wherein:

The FTC suggests, using sales of the drug Paxil as a yardstick, that GSK's no-AG agreement would have been worth hundreds of millions of dollars to Teva. [emphasis added]

(The opinion "explains" in a footnote how "sales of Paxil" can be used as a yardstick for Lamictal sales; the only relevant statistic is the similar market value of Paxil compared with Lamictal immediately prior to generic competition.)

The panel also considered abstaining from marketing an authorized generic to be equivalent to "transfer[ring] the profits the patentee would have made from its authorized generic to the settling generic -- plus potentially more, in the form of higher prices, because there will now be a generic monopoly instead of a generic duopoly."  And this is how the Court makes the equation from frank cash payments to the no authorized generic provisions of this settlement agreement:

Absent a no-AG promise, launching an authorized generic would seem to be economically rational for the brand.  For this reason, the fact that the brand promises not to launch an authorized generic (thereby giving up considerable value to the settling generic) makes the settlement something more than just an agreed-upon early entry: it "may instead provide strong evidence that the patentee seeks to induce the generic challenger to abandon its claim with a share of its monopoly profits that would otherwise be lost in the competitive market." [citing Actavis]

The Court also rejected defendants' argument that the "no authorized generic" portion of the agreement was an exclusive license, inter alia because (in a footnote) the panel stated that the agreement was not an exclusive license and in the body of the opinion opined that licensing could not be used solely for anticompetitive effect.

The result of this decision is that, at least in the Third Circuit, the scope of agreements subject to the rule of reason (or at least not subject to being dismissed for failure to state a claim) includes those having "no authorized generics" provisions in addition to agreements involving cash payments to generic challengers from branded drug makers.  This upsets several earlier decisions in this circuit, and it remains to be seen whether other circuits accept the panel's reasoning in considering this question.

Comments

[Paul F. Morgan]

These kinds of agreements have been challenged on AT grounds by the FTC, myself, and others for many years. Those who foolishly entered into them are now likely to suffer treble damage suits.

[Kevin E. Noonan]

Dear Paul:

Perhaps, and perhaps rightfully so. But several cases before several courts of appeal did not think these agreements raised antitrust issues, and three members of the Court didn't think so, either. Remember that the FTC argued for years that these agreements were per se antitrust violations, while the Court was willing to go only so far as to say they may raise antitrust issues.

My point: it isn't as black (hat) and white (hat) as the FTC and others have argued, and I think treble damages would be a stretch, particularly for agreements that were entered into (such as this one) almost a decade ago.

Thanks for the comment.

[EG]

Paul,

I completely agree with Kevin that you've gone "overboard" in suggesting that such agreements are "foolish" and that treble damages are in play. If anything, it's the FTC that needs to be reigned in with it's outlandish suggestions that all reverse payment agreements are per se AT violations.