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From Antitrust Law Daily, July 6, 2017

Declaratory judgment, Walker Process claims tossed in lawsuit against Novartis

By Mark Engstrom, J.D.

Indirect purchasers of the hypertension drug Diovan could not pursue federal antitrust claims against Novartis Pharmaceuticals, which allegedly defrauded the U.S. Patent and Trademark Office and unlawfully monopolized the market for Diovan, the federal district court in Chicago has ruled. The court denied the plaintiffs’ request for a declaratory judgment of patent invalidity—with respect to a Novartis patent on a tablet form of valsartan (the generic name of Diovan) when "mixed with additives by compression"—because the plaintiffs were not competitors of Novartis, and they faced "no threat of an action for infringement." Although the denial of declaratory relief did not preclude other relief under the Walker Process doctrine, which divested a patent holder of its exemption from the antitrust laws if the patent at issue was procured by fraud, the Walker Process doctrine did not confer standing to indirect purchasers of the patented products. In addition, the plaintiffs failed to plausibly allege a viable claim for Walker-Process fraud based on misrepresentations to the PTO about inventorship, priority, and enablement. Finally, the Walker Process claim was barred by the four-year statute of limitations for federal antitrust claims (Farag v. Health Care Service Corp., July 5, 2017, Leinenweber, H.).

Lawsuit. Pro se plaintiffs Tarek and Soona Farag secured employer-sponsored health insurance through defendant Health Care Service Corporation, d/b/a Blue Cross Blue Shield of Illinois (BCBSIL). The plaintiffs filed a lawsuit against BCBSIL and Novartis in Illinois state court, asserting patent claims (declaratory relief) and antitrust claims (Sherman Act, Clayton Act, and Illinois Antitrust Act). The defendants removed the case to federal court and sought dismissal.

The plaintiffs asserted three counts against Novartis: (1) fraudulently claiming that a team of Novartis employees had invented Diovan; (2) fraudulently claiming patent protection for Diovan (U.S. Patent No. 6,294,197) and thereby "monopolizing it"; and (3) violating the antitrust laws and abusing the company’s monopoly power. The court characterized those claims as: (1) a Walker Process claim that was based on the fraudulent procurement of the ’197 patent; (2) an unlawful monopolization claim under Section 2 of the Sherman Act; and (3) a claim challenging the merger that spawned Novartis as "obvious[ly] … against the antitrust laws."

Declaratory relief. To the extent that the plaintiffs’ claims could be construed as a request for a declaratory judgment that the ’197 patent was invalid or unenforceable due to fraud on the PTO, the court dismissed them as nonviable. Under Federal Circuit law, purchasers of patented goods could not challenge the validity or enforceability of a patent through a declaratory judgment action if they did not compete with the patentee and faced no threat of an infringement action.

Illinois Antitrust Act. To the extent the plaintiffs were seeking relief under the Illinois Antitrust Act, that remedy was not available because federal patent law preempted any state antitrust claim that was premised on fraudulent conduct before the PTO.

Federal antitrust standing. The Seventh Circuit had not determined whether end users of patented products had standing to assert a Walker Process claim if they had not purchased those products from the patentee. Courts in the Second, Third, and Ninth Circuits had, however, and in light of those decisions, the court found that the plaintiffs lacked standing to pursue a Walker Process claim. Significantly, the Novartis patent had not been "tarnished" by a prior finding of inequitable conduct, and the plaintiffs were "indirect" purchasers of Diovan, with respect to Novartis, and in those situations courts declined to find Walker Process standing.

Nevertheless, the Federal Circuit in Ritz Camera & Image, LLC v. SanDisk Corp., 700 F.3d 503 (Fed. Cir. 2012), clearly indicated that Walker Process standing should be interpreted in light of regional circuit law on antitrust standing. The court thus evaluated standing under the law of the Seventh Circuit, which required a private plaintiff to plausibly allege that: (1) it had suffered an antitrust injury and (2) it was an "acceptable plaintiff" to pursue the alleged antitrust actions.

According to the court, the plaintiffs failed to allege a cognizable antitrust injury. First, their complaint clearly stated that at least one form of generic valsartan was available in the market. Consequently, to the extent that Novartis had market power, the company was not maintaining it by erecting insurmountable barriers to the entry of a generic equivalent. Second, the gravamen of the complaint was that Novartis had injured the plaintiffs by charging higher prices (for Diovan) than the generic manufacturers were charging (for generic valsartan), and that type of differential pricing was insufficient to clear the Twombly hurdle. In the court’s view, the higher price of a brand-name drug was consistent with the unilateral exercise of individual market power, which did not violate the antitrust laws.

Further, the plaintiffs were not the "proper" antitrust plaintiffs. With respect to their Clayton Act claims, the Supreme Court’s decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), limited damages actions to direct purchasers. With respect to their Sherman Act claims, the plaintiffs could not satisfy the "direct injury" test for private antitrust actions.

More specifically, the plaintiffs’ allegation of "greed" as an "improper motive" was inconsequential because greed was not unlawful. In addition, the causal connection was "loose," the directness of the injury was "oblique," and the damages were "speculative," according to the court. Finally, duplicative recovery and the apportionment of complex damages was a clear and present risk because "more direct purchasers as well as insurance carriers" paid a significant portion of the allegedly unlawful supra-competitive prices.

Working within that "direct injury" framework, recent Seventh Circuit cases had found that indirect purchasers lacked antitrust standing.

Walker Process fraud. The plaintiffs failed to identify any references or statements that were made to, or withheld from, the PTO, and thus failed to plausibly satisfy the elements of a Walker Process claim or the specificity that was required by Rule 9(b) of the Federal Rules of Civil Procedure.

First, the individuals who were identified as the inventors of Diovan were not listed as inventors of the ’197 patent, but that fact did not create a favorable inference for the plaintiffs because the ’197 patent had expressly disclosed that "[t]he preparation of valsartan is described in U.S. patent specification No. 5,399,578."

Second, the plaintiffs had argued that Novartis knew that its press release was false because U.S. Patent No. 5,696,116—issued to Hoffman-LaRoche—was the first patent to disclose valsartan as a compound to treat high blood pressure. But the court disagreed. The application for the ’578 patent was filed before the application for the Hoffman-LaRoche ’116 patent, the court explained, and the ’578 patent was issued before the Hoffman-Laroche patent.

Finally, experiencing side effects from valsartan, but not from Diovan, did not make the plaintiffs’ argument about "enablement invalidity" plausible. According to the court, "far too many independent factors"—better quality control, for example, and varying absorption rates—could explain the side effects that Tarek had experienced, and those factors were "exceedingly more plausible than impugning the ’197 patent’s written description." Ultimately, the complaint lacked plausible allegations of the patent’s failure to meet the enablement requirement, or of any unlawful conduct by Novartis, in that respect.

Statute of limitations. The plaintiffs’ Walker Process claim was barred by the four-year statute of limitations for federal antitrust claims. According to the court, the plaintiffs filed their claims against Novartis on March 1, 2017, and the Novartis patent was issued on September 25, 2001. The statute of limitations on their Walker Process claim had thus expired on September 25, 2005, nearly a dozen years before their lawsuit was filed. In addition, the lenient "accommodation" for purchaser plaintiffs was unavailing in this this case.

According to the court, the complaint alleged that Tarek’s doctor began prescribing Diovan "long before January 2011," and that Tarek had taken Diovan without interruption until "[a]round the beginning of 2013," when he first tried generic valsartan. The only prices that Tarek had paid for Diovan had all been paid "well before March 1, 2013," the court observed, and his cause of action had thus accrued before then. His Walker Process claim against Novartis was therefore barred by the statute of limitations.

To invoke the discovery rule—or fraudulent concealment—to toll the statute of limitations, the plaintiffs nakedly asserted that they could "not find out how Novartis monopolized Diovan until July 12, 2014." They failed, however, to provide any detail about what they had learned on that date and why they could not have reasonably discovered it earlier. Finally, the case did not involve an overt act—because price increases were not generally considered overt acts—so the continuing violation exception was unavailing.

Clayton Act claim. For many of the reasons already expressed, the plaintiffs’ allegations of a Clayton Act violation failed to state a plausible claim for relief. In addition, the plaintiffs failed to plausibly allege that Novartis had unlawfully used its patent monopoly in the relevant market. Significantly, the complaint admitted the existence of at least one manufacturer of generic valsartan—during times that preceded expiration of the ’197 patent by several years—and the mere allegation that Diovan had steadily increased in price was quite consistent with the rights that Novartis enjoyed by virtue of its immunized patent monopoly.

The Clayton Act claim was also barred by the statute of limitations. Because the merger that the plaintiffs appeared to challenge (the 1996 merger of Ciba-Geigy and Sandoz) had occurred over twenty years ago, the statute of limitations had clearly expired under the default rule. Under the "hold-and-use doctrine," however, subsequent anticompetitive acts by the merger enterprise could be dated from the time that those events had actually transpired.

According to the court, the plaintiff did not plead any facts to support a plausible inference that the alleged misconduct was facilitated by the acquisition. Ciba-Geigy or Sandoz could have independently done exactly what Novartis had allegedly done: patent a drug and unilaterally institute a steady price increase during the term of the patent monopoly.

Even if the hold-and-use doctrine was applicable, the plaintiffs’ cause of action would have accrued at the time that Novartis had instituted its supra-competitive pricing policy. In the court’s view, Novartis would not have waited until 2013—12 years after securing its patent monopoly in 2001—to increase the price of Diovan under a supra-competitive pricing policy that was enabled by the 1996 merger.

Finally, the continuing violation doctrine did not apply to alleged violations of Section 7 of the Clayton Act. To the extent that the plaintiffs’ invoked Section 7 of the Clayton Act, or a comparable theory under the Illinois Antitrust Act, the dismissal of those claims was warranted.

The case is No. 17 C 2547.

Attorneys: Michael H. McColl (Foran, Glennon, Palandech, Ponzi & Rudloff, PC) for Health Care Service Corp., d/b/a Blue Cross Blue Shield of Illinois. Jeffrey Mark Wagner (Arnold & Porter Kaye Scholer LLP) for Novartis Pharmaceuticals Corp.

Companies: Health Care Service Corp., d/b/a Blue Cross Blue Shield of Illinois; Novartis Pharmaceuticals Corp.

MainStory: TopStory Antitrust IllinoisNews

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