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From Antitrust Law Daily, November 6, 2017

Lidoderm purchasers in suit over drug makers reverse payment settlement show antitrust injury causation

By Linda O’Brien, J.D., LL.M.

In a consolidated class action by direct and end purchasers of the brand-name prescription drug Lidoderm against the drug’s manufacturer and distributor challenging the settlement between the manufacturer, distributor, and a generic drug manufacturer to resolve patent infringement litigation, the plaintiffs presented ample evidence that the generic manufacturer would have prevailed in the patent litigation absent the large reverse payment, the federal district court in San Francisco has decided. The plaintiffs also established with undisputed materials facts the relevant antitrust market. Thus, the defendants’ motion for summary judgment was denied and the plaintiffs’ motion for partial summary judgment was granted (United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund v. Teikoku Pharma USA, Inc., November 3, 2017, Orrick, W.).

Endo Pharmaceuticals distributes the brand name drug, Lidoderm, an adhesive patch used to treat pain, under a license agreement with Teikoku Pharma. Teikoku manufactures Lidoderm and holds one of the patents identified in the development of the drug, U.S. Patent No. 5,827,529 (the ‘529 patent) that was set to expire in October 2015. 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 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 delay the introduction of a generic version of Lidoderm and, as a result, the plaintiffs were unable to purchase less expensive version of Lidoderm.

In November 2014, the court, in denying the defendants’ motion to dismiss, found that the plaintiffs plausibly alleged a violation of Section 1 of the Sherman Act. In February 2017, direct and end purchasers of generic lidocaine patches were granted class certification. The plaintiffs alleged two theories of antitrust injury causation: (1) absent the large reverse payment, Watson would have launched at-risk and (2) the parties would have reached an alternative "no payment" settlement giving Watson early entry into the market, absent the large reverse payment. Before the court were the defendants’ motion for summary judgment on all of the plaintiffs’ claims and the plaintiffs’ motion for partial summary judgment on the definition of the relevant market.

Watson’s success in patent litigation. The court determined that the plaintiffs had significant evidence that Watson could have ultimately prevailed in the ‘529 patent litigation. Relying on the conclusions in In re Cipro Cases I & II, 61 Cal. 4th 116 (2015), the court explained that evidence regarding the strength of the patent, assessed as of the time of the settlement, and the existence of a unexplained large reverse payment was relevant to the patent’s weakness and potential infringement.

The defendants’ argument that Watson’s infringement of the ‘529 patent broke the "chain of causation" as illegal activity and could not support an antitrust claim was rejected. In finding that there was some evidence that Watson could have won on invalidity, the court noted that it was undisputed the record was closed at the time of the parties’ settlement—a bench trial was conducted, the parties submitted post-trial briefings, and all that remained was for the court to issue its findings of fact and conclusions of law. Further evidence included the defendants’ contemporaneous assessment that the ‘529 patent was weak, expert analysis that Watson would have won on anticipation and obviousness in light of a prior art reference, and an issue of Teikoku’s inequitable conduct in misleading the USPTO by failing to disclose specific prior art references. The evidence substantiated the "plaintiffs’ assertion that the defendants’ reverse settlement was motivated by Endo and Teikoku’s concerns that their patent rights were at serious risk in light of Watson’s patent litigation," the court found.

Alternative theory of causation. The plaintiffs’ alternative theory of causation—the parties would have agreed to an anticompetitive settlement where no payment was made and only early generic entry was allowed absent the reverse payment settlement—was cognizable, according to the court. The court in In re Wellburtin XL Antitrust Litigation, 133 F.Supp. 3d 734 (E.D. Pa. 2015) recognized the viability of the "alternative settlement" method of proving causation. The plaintiffs’ experts identified various "no payment" settlements providing Watson with early access at different dates that would have been favorable to the defendants and could not be justified by procompetitive reasons. Those expert opinions, based on estimated bargaining strength and calculation of entry dates by valuing the parties’ expectation of profits, applied accepted principles in antitrust law in but-for damage calculations, the court explained.

However, the defendants raised a material dispute of fact on the limited issue as to whether Watson would have manufactured generic Lidoderm in the but-for world at the same rate it did in the actual world. Manufacturing difficulties caused Watson to pause its production of generic Lidoderm from June 2012 to September 2012. The plaintiffs contended that Watson would not have paused production absent the settlement, while the defendants argued that the level of production would have been much slower than it was in the actual world. The parties different interpretations, the court noted in granting the defendants’ motion for partial summary judgment, created a material dispute of fact.

Relevant market. The court found that there was no genuine issue of material fact that the plaintiffs’ showed the relevant product and geographic markets was 5% lidocaine patches, in both branded and generic form. The plaintiffs contended that there was no cross-elasticity of demand between Lidoderm and other pain medications. The defendants’ argument that other products were therapeutically similar was rejected. The court noted that the defendants’ experts ignored cross-elasticity and created a vastly overbroad market that included a host of different classes and types of drugs that were different from 5% lidocaine patches. Substitutes exist for every product but a relevant market cannot meaningfully encompass that infinite range. Further, products are not reasonably interchangeable merely because they share similar forms or functions. The defendants failure to show some cross-elasticity was supported by the undisputed facts that Endo and Teikoku repeatedly characterized Lidoderm as a unique product with unique advantages, the court concluded.

The case is No. 14-md-02521-WHO.

Attorneys: Brian O. O'Mara (Robbins Geller Rudman & Dowd LLP) for United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund. David S. Elkins (Squire Patton Boggs [US] LLP) for Teikoku Pharma USA and Teikoku Seiyaku Co.

Companies: United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund; Teikoku Pharma USA, Inc.; Teikoku Seiyaku Co., Ltd.; Endo Pharmaceuticals, Inc.

MainStory: TopStory Antitrust CaliforniaNews

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