United States: A No-AG Settlement Agreement Is Subject To Actavis' Rule Of Reason Analysis

King Drug Company of Florence, Inc. v. SmithKline Beecham Corp., et al. (3d Cir. June 26, 2015)

Plaintiffs, direct purchasers of the brand-name drug Lamictal® (lamotrigine), sued Lamictal's producer, SmithKline Beecham Corporation (SmithKline Beecham) doing business as GlaxoSmithKline (GSK) and Teva Pharmaceuticals Industries Ltd. (Teva), a manufacturer of generic Lamictal, for violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 & 2. The U.S. District Court for the District of New Jersey granted Defendants' Rule 12(b)(6) motion to dismiss for failure to state a rule of reason claim under Sections 1 and 2 of the Sherman Act. On appeal, the U.S. Court of Appeals for the Third Circuit was asked to determine whether FTC v. Actavis,—U.S.—, 133 S. Ct. 2223 (2013) covers, in addition to reverse cash payments, a settlement that includes a no-authorized generic agreement (no-AG agreement.). The Third Circuit held that a no-AG agreement falls under Actavis because it may represent an unusual, un-explained 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. Accordingly, these kinds of settlements are subject to the rule of reason. King Drug Company of Florence, Inc. v. SmithKline Beecham Corp., et al., 791 F.3d 388 (3d Cir. 2015)


In earlier Paragraph IV litigation, Teva had challenged the validity and enforceability of GSK's patent on lamotrigine, Lamictal's active ingredient. GSK's lamotrigine patent expired on July 22, 2008. Teva was the first generic to file an application with the U.S. Food and Drug Administration (FDA) alleging patent invalidity or un-enforceability and seeking approval to market generic lamotrigine tablets and chewable tablets for markets alleged to be annually worth $2 billion and $50 million, respectively. In February 2005, after the court ruled that GSK's main patent claim was invalid, GSK and Teva settled. They agreed that that in exchange for Teva dropping its challenge to GSK's patent, GSK would: (1) allow Teva to enter the $50 million annual chewable lamotrigine tablet market no later than June 1, 2005 (37 months before patent expiration); (2) allow Teva to enter the $2 billion annual lamotrigine tablet market on March 1, 2008 (or July 21, 2008, if GSK received a pediatric exclusivity extension); and (3) GSK would not produce its own "authorized generic" version of lamotrigine tablets until after Teva's 180-day market exclusivity expired.

Direct Purchasers of Lamotrigine File Class Action Complaint

Direct purchasers of lamotrigine from GSK sued GSK and Teva in February 2012. They alleged that, by their no-AG agreement, Defendants—in effect, a "reverse payment" from GSK to Teva—violated Section 1 of the Sherman Act by conspiring to delay generic competition for Lamictal tablets and Section 2 by conspiring to monopolize the lamotrigine tablet market. GSK and Teva moved to dismiss, claiming that under In re K-Dur Antitrust Litigation, 686 F.3d 197 (3rd Cir. 2012), only cash payments constitute actionable "reverse payments." In K-Dur, the court held that rule-of-reason scrutiny is proper for reverse payment settlements.

The district court granted the defendants motion to dismiss and noted that, while Teva surely received consideration or otherwise would have no incentive to settle, it viewed the parties settlement as "based on negotiated entry dates" rather than money. The court found that "from a policy perspective, this settlement did introduce generic products onto the market sooner than what would have occurred had GSK's patent not been challenged." Accordingly, the court concluded that the settlement was not subject to antitrust scrutiny under K-Dur.

Plaintiffs appealed and the Third Circuit stayed proceedings pending the Supreme Court of the United States' decision in Actavis. After Actavis, the circuit court remanded the case back to the district court for further consideration in view of the Supreme Court's decision. The district court interpreted Actavis (as it had K-Dur before), as requiring antitrust scrutiny only of reverse-payment settlements that involve an exchange of money rather than some other type of valuable consideration. In the alternative, the district court found that the settlement "would survive Actavis scrutiny and is reasonable." In January 2014, the district court affirmed its order of dismissal.

Third Circuit Holds that No-AG Settlement Agreement Should Be Analyzed Under Antitrust "Rule of Reason"

The Third Circuit found that Actavis is not limited to reverse payments of cash. Specifically, the Third Circuit found that a no-AG agreement, when it represents an un-explained large transfer of value from the patent holder to the alleged infringer, may be subject to antitrust scrutiny under the rule of reason. Accordingly, the court found that Plaintiffs' allegations were sufficient to state a claim under the Sherman Act.

In its decision, the Third Circuit analyzed the "five sets of considerations" that the Actavis court found weighed in favor of permitting antitrust scrutiny in reverse payment settlements: (1) potential for genuine adverse effects on competition; (2) whether any anticompetitive consequences are justified; (3) does the patentee possess power to bring about anticompetitive harm; (4) the size of the un-explained reverse payment; and (5) other ways to settle without the patentee paying the challenger to stay out of the market.

But un-like in Actavis, no instance of reverse payment of cash existed in this case. Public records did show, however, that generic sales of Lamictal in 2008 were approximately $671 million. Plaintiffs also pointed to the drug Paxil® (paroxetine) as a measuring stick, suggesting that GSK's no-AG agreement would have been worth hundreds of millions of dollars to Teva. The court noted that a brand's commitment not to produce an authorized generic means that it must give up the valuable right to capture profits in the new two-tiered market: "The no-AG agreement transfers 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." Relying on Actavis, the court commented that a no-AG agreement may 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 a competitive market.

The Third Circuit also found that the anticompetitive consequences of a no-AG agreement may be as harmful as those resulting from reverse payments of cash. For example, as with a reverse payment of cash, a brand agreeing not to produce an authorized generic may have avoided the risk of patent invalidation or a finding of non-infringement. In addition, when the parties settlement includes a no-AG agreement, the generic also presumably agrees to a market entry date that is later than it would have otherwise accepted. During this time, the brand's monopoly remains in force. And once the generic enters, it does not face other generic competition (at least for the 180-day exclusivity period).

Defendants argued that GSK's concession not to produce an authorized generic during Teva's 180-day exclusivity period is in essence an "exclusive license," exempt from antitrust scrutiny. The court rejected this argument finding that although a patent holder generally has the right to grant licenses, it does not mean it has the right to give a challenger a license along with a promise not to compete (i.e., no-AG agreement) in order to induce the challenger to abandon its invalidity or non-infringement claim. The court noted that in Actavis' view, the question is not one of patent law, but of antitrust law, the latter of which prohibits "the improper use of [a patent] monopoly."

The defendants also tried to re-characterize any gain to Teva as resulting from its early entry alone. Again, the Third Circuit rejected this argument. GSK gave Teva a 180-day monopoly over the generic market. The court reasoned that Teva, as the first-to-file generic could not capture this value by early market entry alone. The court also noted that in Actavis, generic entry was allowed 65 months before patent expiration. Notwithstanding such early entry, the potential antitrust problem was that entry might have been earlier and/or the risk of competition not eliminated had the reverse payment not been tendered.

Finally, the Third Circuit found the district court's finding that the settlement was reasonable and would survive Actavis scrutiny to be erroneous. The court found that the plaintiffs had sufficiently pleaded violation of antitrust laws so as to overcome defendants' motion to dismiss. Moreover, the court found the rule-of-reason analysis to be for the finder of fact, not the court as a matter of law.

A No-AG Settlement Agreement Is Subject To Actavis' Rule Of Reason Analysis

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