Third Circuit Wades Into Intersection of IP and Antitrust: First gloss on FTC v. Actavis focuses on non-monetary branded-generic deals

Thursday, September 17, 2015 - 12:46

On June 26, 2015, the Third Circuit became the first circuit court to interpret the United States Supreme Court’s landmark decision, FTC v. Actavis, 133 S. Ct. 2223 (2013), which held that reverse cash or “pay for delay” payments from a patent holder to a generic manufacturer are subject to antitrust scrutiny. In King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp. d/b/a GlaxoSmithKline, et al., 791 F.3d 388 (3d Cir. Jun. 26, 2015) (Scirica, J.), the Third Circuit panel held that the Actavis holding is applicable beyond reverse cash payments, to non-cash agreements. Specifically, the court found that “a no-AG [no-authorized generic] agreement, when it represents an unexplained large transfer of value from the patent holder to the alleged infringer, may be subject to antitrust scrutiny under the rule of reason.”[1]

King Drug involved an appeal from the district court’s dismissal of plaintiffs’ class action complaint against GlaxoSmithKline (“GSK”) and Teva Pharmaceuticals (“Teva”). Plaintiffs, a putative class of direct purchasers of the brand drug Lamictal (a drug for the treatment of epilepsy and bipolar disorder), alleged that a 2005 non-cash settlement agreement between GSK and Teva, regarding GSK’s drug Lamictal, violated the Sherman Act.  

In 2002, Teva filed an abbreviated new drug application (“ANDA”) with the FDA to market a generic version of Lamictal. Soon thereafter, GSK sued Teva for patent infringement under the Hatch-Waxman Act. The case went to trial in January 2005, and the district court found that Claim 1 of the patent, for the invention of the active ingredient Lamotrigine, was invalid. Before the remaining patent claims could be adjudicated, the parties entered into settlement pursuant to which Teva agreed not to pursue its invalidity and unenforceability claims against the patent and GSK agreed to permit Teva early entry into the Lamictal chewables market (valued at approximately $50 million annually) - approximately three years prior to when the patent was set to expire. With respect to the Lamictal tablets market (valued at approximately $2 billion annually), the settlement contained a no-AG agreement, whereby GSK agreed that it would not market its own generic version of Lamictal tablets until after Teva’s first filer 180-day exclusivity period expired.  

Under the Hatch-Waxman Act, the generic manufacturer that is first to file an ANDA with the FDA and tender a Paragraph IV certification attesting that the pertinent patents are unenforceable, or that its generic version of the drug will not infringe the patents, is awarded a 180-day exclusivity period to market its drug. The 180-day exclusivity period runs from the earlier of the date of a judgment of patent invalidity or unenforceability, or from the date the generic manufacturer receives FDA approval. During this exclusivity period, no other generic manufacturer may enter the market. Rather, only the patent holder and the first filer have the right to market a generic version of the subject drug during this period. In a no-AG agreement, the patent holder, often in exchange for the generic manufacturer’s delayed entry into the market, agrees to refrain from marketing its authorized generic version of the drug during the pendency of the exclusivity period. No-AG agreements can be of great value to a generic manufacturer as they mean the generic manufacturer will not face any competition during that much-coveted 180-day exclusivity period, permitting it to price the drug accordingly.

The King Drug plaintiffs claimed that the no-AG agreement contained in the GSK-Teva settlement constituted an illegal reverse payment subject to antitrust scrutiny under the rule of reason framework adopted in Actavis. That was because the no-AG agreement, according to plaintiffs, was designed to convince Teva to abandon its patent challenge and thereby eliminate the risk of competition for longer than the patent would otherwise permit. The district court rejected this argument. It held that Actavis did not apply to non-cash reverse payments and, even if it did, the no-AG agreement would survive rule of reason scrutiny. The Third Circuit vacated the district court’s dismissal, breathing new life into plaintiffs’ claims. The court found that the no-AG agreement “falls under Actavis’s rule because it 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.”[2]  The court noted that no-AG agreements are likely to present the same anticompetitive concerns as those the Supreme Court recognized regarding reverse cash payments, such as the potential to quell the risk of competition, and thus they must be subjected to antitrust scrutiny. As a result, the court determined that the Actavis holding is not limited to reverse payments that involve money.  

Further, the Third Circuit rejected the defendants’ argument that a no-AG agreement should be exempt from antitrust scrutiny because it is akin to an exclusive license, which is permitted under patent law. The court found that no-AG agreements are not distinguishable from the reverse cash payments addressed in Actavis: “[t]he thrust of the [Actavis] Court’s reasoning is not that it is problematic that money is used to effect an end to the patent challenge, but rather that the patentee leverages some part of its patent power (in Actavis, its supracompetitive profits) to cause anticompetitive harm – namely, elimination of the risk of competition.”[3]  The court reasoned that simply because a patent holder has statutory authority to grant an exclusive license “does not mean it also has the right to give a challenger a license along with a promise not to produce an authorized generic – i.e., a promise not to compete – in order to induce the challenger to respect its patent and quit [the competitor’s] patent invalidity or non-infringement claim without any antitrust scrutiny.”[4]

The Third Circuit remanded the case to the district court for antitrust scrutiny under the rule of reason framework set forth in Actavis. Appellees sought leave for rehearing by the panel or en banc, but the Third Circuit denied their request on September 23, 2015.

King Drug is the first of what will likely become many circuit court applications of the Actavis decision. While it remains to be seen whether other circuits will follow the Third Circuit’s approach, for now, King Drug provides patent litigants with valuable insight into the potential antitrust exposure that may arise from settlement agreements involving exchanges of cash or non-cash value when coupled with delayed entry into the market.

 

[1] King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp. d/b/a GlaxoSmithKline, et al., 791 F.3d 388, 403 (3d Cir. Jun. 26, 2015).

[2] Id. at 394.

[3] Id. at 407. 

[4] Id. (internal quotation marks omitted).

Amy M. Handler is an associate in the Sills Cummis & Gross P.C. Litigation and Product Liability Practice Groups.  She can be reached at ahandler@sillscummis.com.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.