Cash-Payment Rule Needed For Pay-For-Delay Litigation Frenzy

The fallout from the Supreme Court’s decision last Summer in FTC v. Actavis remains unabated as a host of purported classes of direct and indirect drug payers continue to file suits against branded and generic manufacturers for settling their Hatch-Waxman disputes in deals involving delayed market entry of cheaper, generic drugs.  While some of the settlements involved a genuine cash “reverse payment” from the branded to the generic manufacturer, as was the case in Actavis, settlements lacking any cash payment are also under attack.  However, a recent dismissal of a pay-for-delay federal suit in New Jersey on the basis that no cash reverse payment was involved will likely cause the Third Circuit and perhaps eventually the Supreme Court to decide whether Actavis’s antitrust “rule of reason” approach can and should be applied to non-cash reverse payment settlements. 

Background

As Pharmarisc readers well know, we have covered and reported on the Actavis saga and wave of pay-for-delay antitrust class action litigation for almost a year.  (Read Plaintiff’s Bar and FTC Launch Antitrust Offensive Against Patent Settlements, Niaspan Antitrust Suit Underscores High Stakes in Supreme Court Pay-for-Delay Decision, and Supreme Court Deals Blow to Reverse Payment Settlements, for further background).  Since our last post on the subject in September, there have been several new antitrust class action suits by different purported payer classes filed against Teva Pharmaceuticals, Inc., and Boehringer Ingelheim Pharmaceutical, Inc. (“BI”)  over BI’s $120 million reverse payment to Teva subsidiary Barr Pharmaceuticals, which settled their Hatch-Waxman litigation and delayed entry of Barr’s generic version of Aggrenox from 2008 until 2015.  (Aggrenox, which had been approved by the FDA in 1999, is used to lower the risk of stroke in people who have had a “mini-stroke,” i.e., “transient ischemic attack” or “TIA,” or stroke due to a blood clot).

More interesting than suits based on true cash reverse payments, however, have been those suits where no cash transfer was made, but in which the generic manufacturer got something of “value” from the branded manufacturer in exchange for delayed market entry of the generic drug.  Of these suits, the case to watch is In Re: Lamictal Direct Purchaser Antitrust Litigation, 12-CV-995 (D.N.J.) (WHW).  As we reported last September, GlaxoSmithKline (“GSK”) and Teva Pharmaecuticals had settled their Hatch-Waxman litigation and even avoided including a reverse payment from GSK to Teva as part of the settlement.  However, as part of the deal, GSK agreed that Teva could enter the market prior to the patent’s expiration and that it would not launch its own generic versions of Lamictal products (i.e., “authorized generic” or “AG” drugss), thereby providing Teva with generic exclusivity during the early entry periods.  Notwithstanding the district the court’s ruling in December, 2012, that the absence of a cash reverse payment barred recovery under the antitrust laws, thus distinguishing the case-in-suit from the Third Circuit’s binding K-Dur decision — which had labeled all cash reverse payments as anti-competitive — the plaintiffs eventually appealed and the Third Circuit remanded the case in light of Actavis.

GSK and Teva moved to dismiss the plaintiffs’ now-amended complaint.  In opposing the motion, the plaintiffs focused the court’s attention on the opinions of the FTC and other district courts in New Jersey and Massachusetts that, notwithstanding the absent of a cash transfer, Actavis’s rule of reason analysis should in essence be applied to all Hatch-Waxman settlements in which the generic manufacturer received value in exchange for delayed generic market entry.  After reviewing both sides’ arguments, the district court granted the motion to dismiss, holding that Actavis’s rule of reason analysis only applies to settlements where a cash transfer is made and rejecting the differing views of the FTC and other courts.   The district court also held that even if the rule of reason were applied to the GSK-Teva settlement, no antitrust violation occurred.

Observations

The district court’s decision is likely headed for oral argument before the Third Circuit.  Given that the Third Circuit created the original circuit court split that led to Actavis, by finding that all cash reverse payment settlements are presumptively anti-competitive, one would think there is a very good chance the court will liberally construe Actavis to encompass non-cash Hatch-Waxman settlements.  However, should the Court nonetheless affirm the district court’s holding that, applying the rule of reason test, no antitrust violation occurred, it is less likely the Supreme Court would be interested in any appeal.  On the other hand, should the Third Circuit both hold that Actavis applies to non-cash settlements and also find that GSK’s no-AG covenant to Teva was anti-competitive, there is a greater likelihood that the Supreme Court will be more receptive to an almost certain appeal by GSK and Teva.

Regardless of what happens in Lamictal, it is important that the Supreme Court clearly address whether the rule of reason approach applies to all patent settlements or just those involving cash payments.  Should the High Court decide once again to chart some sort of middle ground, leaving room for a rule of reason approach to certain kinds of non-cash settlements, the FTC and plaintiff’s lawyers will not rest in attacking all Hatch-Waxman settlements with the knowledge that some judges will be sympathetic to their point of view.

However, if all Hatch-Waxman settlements are open to attack, what’s the point of settling?  And, if there is no point of settling, will generic manufacturers be as willing to challenge the validity of pharmaceutical patents in winner-take-all contests?  If not, will consumers — you know, the folks the FTC is supposed to be thinking about — benefit in the long run from fewer patent challenges?  Absent a clear rule that subjects only true cash reverse payments to rule of reason antitrust scrutiny, the FTC’s cure for anti-competitive Hatch-Waxman settlements might end up being worse than the disease.

 

 

About José P Sierra

José Sierra is a partner at Laredo & Smith, LLP, in Boston, which provides respected advice and creative representation in business litigation, white collar criminal defense, government investigations, corporate compliance, and business and employment law. Prior to joining the Firm, Mr. Sierra was a principal at Fish & Richardson. Previously, Mr. Sierra was senior vice president, chief compliance and ethics officer for Sepracor Inc., and Kos Pharmaceuticals, and was legal director at Schering-Plough Corporation, and an assistant U.S. attorney in the Newark, NJ U.S. Attorney's Office.

Mr. Sierra's practice focuses on white collar criminal defense, government investigations and corporate compliance. Contact him at 617-443-1100 or via email.

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