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From Antitrust Law Daily, November 18, 2014

Challenge to Lidoderm patent infringement settlement can proceed

By Linda O’Brien, J.D., LL.M.

In a consolidated class action by direct and end purchasers of the brand drug Lidoderm—challenging a settlement between the manufacturer, distributor, and a generic manufacturer to resolve patent infringement litigation—the plaintiffs plausibly alleged a violation of Section 1 of the Sherman Act, the federal district court in San Francisco has decided. However, the plaintiffs’ attempted monopoly claims under Section 2 of the Sherman Act were dismissed (United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund v. Teikoku Pharma USA, Inc., November 17, 2014, Orrick, W.).

Endo Pharmaceuticals distributes Lidoderm, an adhesive patch used to treat pain. Teikoku Pharma manufactures Lidoderm and holds one of the patents identified in the development of the drug. In 2009, generic drug manufacturer Watson Pharmaceuticals sought to market a generic version of Lidoderm and submitted an abbreviated new drug application (ANDA) to the Food and Drug Administration (FDA). Subsequently, Endo and Teikoku sued Watson for patent infringement. While the litigation was pending, Endo, Teikoku, and Watson settled. Under the settlement, (1) Watson agreed to delay launch of its generic Lidoderm until September 2013; (2) Endo and Teikoku would drop their pending lawsuit; (3) Endo and Teikoku would give Watson $96 million in Lidoderm patches to sell with the condition that Watson would honor Endo and Teikoku’s existing price related contracts; and (4) Endo and Teikoku would delay the release of their authorized generic until seven-and-a-half months after Watson began selling its generic version.

A series of class action suits were filed against Endo and Teikoku by three groups of purchasers of Lidoderm—suppliers to retail purchasers (DPPs), employee health and welfare benefit funds (EPPs), and the Government Employee Health Association (GEHA)—alleging in part violations of Sections 1 and 2 of the Sherman Act. The plaintiffs asserted that the settlement agreement between Endo, Teikoku, and Watson delayed the introduction of a generic version of Lidoderm and, as a result, the plaintiffs were unable to purchase less expensive version of Lidoderm. The defendants moved for dismissal.

Reverse payment. The court determined that the plaintiffs plausibly alleged that the settlement was a reverse payment. The plaintiffs specifically alleged that the provision of the brand name product was not procompetitive because it did not “increase output, reduce price, or increase consumer choice” and Watson, by agreeing to honor Endo and Teikoku’s existing price related contracts, in fact sold brand name Lidoderm at the same supra-competitive prices as Endo. Moreover, the plaintiffs alleged that Watson would have released its generic Lidoderm before September 2013 if Endo and Teikoku had not paid $96 million in brand product.

Large and unjustified. The value of the reverse payments was large and unjustified, according to the court. Under the parties’ own settlement terms, Endo and Teikoku agreed to give Watson brand products totaling $12 million per month for eight months, which was expected to generate $96 million in sales. The settlement term was a simple transfer of fungible product, and the plaintiffs plausibly alleged facts sufficient to support their calculations. Moreover, the plaintiffs estimated the value of the settlement terms, under which Endo and Teikoku agreed to delay the launch of their authorized generic, by calculating the difference between Watson’s projected revenue under the agreement and its projected revenues had it competed with Endo’s authorized generic from the beginning.

The court noted that, under the U.S. Supreme Court decision in FTC v. Actavis, Inc., 133 S.Ct. 2224 (2013), a payment is justified when it reflects “traditional settlement considerations, such as avoided litigation costs.” Although the plaintiffs did not provide an estimate of the avoided litigation costs, they argued that the payments were so large that they had no rational connection and far exceeded any approximate costs of continuing patent litigation. Because the defendants were unable to show that their expected litigation costs justified the value of the settlement terms, the plaintiffs’ allegations that the payments were large and unjustified were plausible, the court stated.

Rule of reason. The defendants’ argument that the settlement did not pass the rule of reason test because it was pro-competitive as a matter of law was rejected. The plaintiffs alleged that the outcome of the patent litigation was reasonably certain to favor Watson and the size of the settlement payments supported those allegations. It was not necessary to analyze the validity of the patents in the settled litigation in order to find that the allegations were adequate to meet the rule of reason, the court noted.

Antitrust injury. Additionally, the court determined that the plaintiffs’ plausibly alleged that the settlement caused an antitrust injury. The plaintiffs set forth two theories of injury: (1) Watson was able and willing to launch “at-risk” as soon as it received FDA approval and (2) the settlement delayed entry of generic Lidoderm into the market. In support of their allegations, Watson had increased production capacity and procured the raw materials in preparation for launch in 2012. Moreover, the size of the payments indicated Endo and Teikoku’s fear that Watson would have cleared regulatory hurdles and launched its generic before September 2013. Thus, the defendants’ motion to dismiss the plaintiffs’ Section 1 claims under the Sherman Act was denied.

Attempted monopoly. A plaintiff alleging attempted monopoly under Section 2 of the Sherman Act must demonstrate (1) a specific intent to control prices or destroy competition; (2) anticompetitive conduct directed at accomplishing that purpose; (3) a dangerous probability of achieving monopoly power; and (4) causal antitrust injury. The court noted that a monopoly, by definition, consists of a single firm, and the plaintiffs’ complaints did not distinguish whether Endo or Teikoku possessed monopoly power. The plaintiffs did not allege that either Endo or Teikoku individually had market power in the United States over Lidoderm. Finally, the plaintiffs cited no authority in which an exclusive distribution agreement, like the one between Endo and Teikoku, sufficed to show a joint venture and liability for a monopolization claim. Since the plaintiffs failed to specifically allege that Endo and Teikoku conspired to give or the other monopoly power, their monopoly claims were dismissed.

The case is No. 14-md-02521-WHO.

Attorneys: Brian O. O'Mara (Robbins Geller Rudman & Dowd LLP), Christina H. Sharp (Girard Gibbs LLP), and Gregory S. Asciolla (Labaton Sucharow LLP) for United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund and Fraternal Order of Police, Fort Lauderdale Lodge 31, Insurance Trust Fund, and NECA-IBEW Welfare Trust Fund. Lionel Z. Glancy (Glancy Binkow & Goldberg LLP) for Plumbers & Pipefitters Local 178 Health & Welfare Trust Fund. Andrew Michael Purdy (Joseph Saveri Law Firm) for Local 17 Hospitality Benefit Fund. David S. Elkins (Squire Patton Boggs) for Teikoku Pharma U.S.A., Inc., and Teikoku Seiyaku Co., Ltd. Brigid M. Carpenter (Baker, Donelson, Bearman, Caldwell & Berkowitz, PC), and John A. Tarantino (Adler Pollock & Sheehan PC) for Endo Pharmaceuticals, Inc. James Patrick Schaefer (Skadden Arps Slate Meagher & Flom LLP) for Watson Pharmaceuticals, Inc., Actavis Plc.

Companies: United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund; Plumbers & Pipefitters Local 178 Health & Welfare Trust Fund; Local 17 Hospitality Benefit Fund; Fraternal Order of Police, Fort Lauderdale Lodge 31, Insurance Trust Fund; NECA-IBEW Welfare Trust Fund; Teikoku Pharma USA, Inc.; Teikoku Seiyaku Co., Ltd.; Endo Pharmaceuticals, Inc.

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