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From Antitrust Law Daily, June 26, 2015

High Court holding on reverse payment agreements not limited to cash payments

By Greg Hammond, J.D.

An agreement to delay the introduction of a generic version of the prescription anti-seizure drug Lamictal, in exchange for dismissal of litigation challenging the validity of certain patents, could violate antitrust law, the U.S. Court of Appeals in Philadelphia has held. The U.S. Supreme Court’s decision in Federal Trade Commission v. Actavis, Inc.holding that Hatch-Waxman reverse payment settlement agreements were not immune from antitrust attack—was not limited to reverse payments of cash, according to the Third Circuit. The appellate court found that the agreement at issue threatened the same type of harm to competition as a cash payment agreement (King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp., June 26, 2015, Scirica, A.).

The instant action was brought by purchasers of lamotrigine, which is used to treat medical conditions such as epilepsy, bipolar disorder, and other disorders involving seizures. SmithKline Beecham Corp., doing business as GlaxoSmithKline LLC (GSK), holds the patent for lamotrigine, which is marketed under the brand Lamictal. Teva, a generic pharmaceutical company, sought U.S. Food and Drug Administration approval to market a generic version of Lamictal. GSK sued Teva for patent infringement. After three years of litigation, the parties settled in 2005. Under the settlement, in exchange for dropping its challenge to GSK’s patents, Teva was allowed to market generic lamotrigine before the relevant patent expired and ensured that once it did so, its generic tablets and chewables would not face competition from GSK’s own “authorized generic” for a certain period of time. The plaintiffs alleged that the terms of the settlement agreement between GSK and Teva violated federal antitrust law.

The federal district court in Newark, New Jersey, dismissed the plaintiffs’ complaint for failure to state a claim. Specifically, the lower court found that Actavis did not require a preliminary finding of a “reverse payment,” and that the analysis only applied to settlements that contained reverse payments, which the challenged settlement did not include. Other types of settlements were explicitly exempt, in the lower court’s view. The plaintiffs appealed.

According to the Third Circuit, the issue it needed to decide was: Whether the Supreme Court’s Actavis decision covers, in addition to reverse cash payments, a settlement in which the patentee drug manufacturer agrees to relinquish its right to produce an “authorized generic” of the drug (no-AG agreement) to compete with a first-filing generic’s drug during the generic’s statutorily guaranteed 180 days of market exclusivity under the Hatch-Waxman Act as against the rest of the world.

The court sided with the plaintiffs, finding that Actavis’ holding cannot be limited to reverse payments of cash. Rather, the court believes that a no-AG 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.

Specifically, the court noted that no-AG agreements were likely to present the same types of problems as reverse payments of cash—the potential to negatively impact consumer welfare by preventing the risk of competition—and that the no-AG agreement in this case may be of great monetary value to Teva as the first-filing generic. The court consequently concluded that the Actavis Court did not limit its reasoning or holding to cash payments only.

The defendants argued that no-AG agreements were distinguishable from reverse payments because they were in essence “exclusive licenses,” and patent law expressly contemplates exclusive licenses. They further asserted that if the patent statute specifically gives a right to restrain competition in the manner challenged, such conduct is immune from antitrust scrutiny. The court, however, rejected this argument, finding that the “right” the defendants sought was a right to use valuable licensing in such a way as to induce a patent challenger’s delay.

The court also rejected the defendants’ arguments that subjecting no-AG agreements to scrutiny would discourage settlements, citing the Actavis Court’s finding that possible discouragement of settlements was outweighed by other considerations and that the parties could find other ways to settle patent disputes without the use of reverse payments.

The defendants next argued that the plaintiffs still failed to state a claim because the allegations were far too speculative to satisfy their burden of plausibly alleging that the settlement was anticompetitive. This argument was also rejected, as the court found the plaintiffs sufficiently alleged that any procompetitive aspects of the chewables arrangement were outweighed by the anticompetitive harm from the no-AG agreement. The substantive standard, according to the court, was not whether the defendants had only possibly acted unlawfully, but whether they had acted unlawfully by seeking to prevent competition, which plaintiffs sufficiently alleged.

Finally, the court rejected the lower court’s alternative finding that the settlement would survive Actavis scrutiny and was reasonable. The plaintiffs sufficiently pleaded violation of the antitrust laws so as to overcome defendants’ motion to dismiss. Further, the court found that if genuine issues of material fact remained after discovery, the rule-of-reason analysis is for the finder of fact, not the court as a matter of law.

The case number is 14-1243.

Attorneys: Bruce E. Gerstein (Garwin Gerstein & Fisher) and Peter S. Pearlman (Cohn, Lifland, Pearlman, Herrmann & Knopf) for Appellants. Douglas S. Eakeley (Lowenstein Sandler) and Barbara W. Mather (Pepper Hamilton) for SmithKline Beecham Corp. Jay P. Lefkowitz and Jonathan D. Janow (Kirkland & Ellis) for TEVA Pharmaceutical Industries LTD and TEVA Pharmaceuticals.

Companies: King Drug Co. of Florence, Inc.; Louisiana Wholesale Drug Co., Inc.; SmithKline Beecham Corp.; Teva Pharmaceutical Industries Ltd.; Teva Pharmaceuticals

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