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ND Cal. Judge Holds that Actavis Applies to Non-cash Payments
Practical Law Legal Update 0-589-2745 (Approx. 4 pages)
ND Cal. Judge Holds that Actavis Applies to Non-cash Payments
by Practical Law Antitrust
| Published on 21 Nov 2014 • USA (National/Federal) |
Judge William H. Orrick of the US District Court for the Northern District of California held in United Food and Commercial Workers Local 1776 v. Teikoku Pharma USA, Inc. that plaintiffs plausibly alleged a violation of Section 1 of the Sherman Act by plausibly alleging the value of a non-cash reverse payment settlement, among other things.
On November 17, 2014, Judge William H. Orrick of the US District Court for the Northern District of California held in United Food and Commercial Workers Local 1776 v. Teikoku Pharma USA, Inc. (No. 14-md-02521-WHO (N.D. Cal. Nov. 17, 2014)) that the US Supreme Court's ruling in FTC v. Actavis, 133 S. Ct. 2223 (2013) applies to non-cash reverse payment settlement agreements (known as pay-for-delay agreements). In United Food, Judge Orrick held that plaintiffs, a class of direct and indirect purchasers of adhesive pain patch Liboderm, plausibly alleged that defendants, brand-name manufacturers Endo Pharmaceuticals and Teikoku Pharma, entered into an anticompetitive reverse payment settlement agreement with generic manufacturer Watson Pharmaceuticals in violation of Section 1 of the Sherman Act.
Under the terms of the agreement, Watson agreed to delay introducing a generic form of Liboderm in exchange for:
- Endo and Teikoku:
- dropping their pending patent infringement suit against Watson;
- supplying Watson with $12 million worth of branded Liboderm to distribute or sell per month for eight months, expected to result in $96 million in sales, with the condition that Watson would observe Endo and Teikokus' existing price-related contracts; and
- agreeing to not launch their authorized generic form of Liboderm until seven and a half months after Watson began selling its generic version (a no-authorized-generic or no-AG agreement).
- Watson paying Endo and Teikoku a 25% royalty of its gross profit for generic Liboderm during the exclusivity period.
Judge Orrick denied defendants' motion to dismiss plaintiffs' claim that the settlement violated Section 1 of the Sherman Act under the rule of reason. However, Judge Orrick dismissed plaintiffs' claims that defendants' actions violated:
- Section 1 of the Sherman Act under a per se illegal analysis, as no case has ever analyzed no-AG agreements under the per se standard.
- Section 2 of the Sherman Act, as monopolization or attempted monopolization claims cannot be brought against two separate entities as a single actor.
All Early-entry Agreements are Not Protected from Antitrust Scrutiny
Defendants argued that the settlement should be protected from antitrust scrutiny because it was:
- Simply an early-entry settlement that allowed Watson to enter the market before it would have been able to under traditional patent regulations.
- Procompetitive, as it allowed Watson to sell other branded Liboderm to consumers.
However, Judge Orrick noted that under early-entry settlements, the value of the settlement must solely come from the generic firm's ability to enter the market earlier and compete with the branded product. In such agreements, consumers benefit from the entry. In this case, Judge Orrick held that plaintiffs plausibly alleged that, in addition to the ability to enter the market early, the value of the settlement included a payment in the form of the supply of branded Liboderm and agreeing to delay authorized generic entry. Plaintiffs also plausibly alleged that the agreement had no procompetitive effects because the agreement:
- Did not increase output.
- Required Watson to honor defendants' price contracts and prevented Watson from selling the branded Liboderm at a competitive price.
Judge Orrick held that plaintiffs plausibly alleged that although Watson was allowed early-entry to the Liboderm market, the agreement in its entirety was not considered beneficial to consumers, and should therefore be subject to antitrust scrutiny.
Actavis Applies to Non-cash Payments
Judge Orrick noted the current split among district courts as to whether non-cash payments are considered reverse payments under Actavis. He explained courts have hesitated to recognize non-cash payments under Actavis because of the alleged difficulty in valuing non-cash payments to prove the payment was large and unjustified as required under Actavis. However, Judge Orrick argued that not all non-cash payments are impossible to value, and that they should not be precluded from analysis under Actavis.
Judge Orrick held that plaintiffs provided straightforward evidence of the value of the non-cash reverse payment, particularly the $96 million in product sales that Endo and Teikoku granted to Watson. Judge Orrick conceded that the agreement by Endo and Teikoku to delay entry of their generic Liboderm was more difficult to calculate. However, he held that plaintiffs plausibly alleged the value of that agreement by calculating the difference in Waston's projected revenue under the agreement and its projected revenue had it competed with a generic version from Endo and Teikoku from the start. Plaintiffs calculated the projected revenues based on an FDA statistic that the first generic drug to market with no competition typically captures 80% of the brand-name market at 90% of the brand-name price, while a generic drug competing with an authorized generic drug only captures 40% of the market at 52% of the brand-name price.
Payment was Large and Unjustified
Defendants argued that because plaintiffs did not establish the value of litigation costs avoided by the settlement, they were unable to prove that the payments at issue were large and unjustified as required by Actavis. Instead, plaintiffs argued that the total estimated cost of the payments (approximately $266 million) was so large that it exceeded any rational estimate of litigation costs. Judge Orrick held that plaintiffs' allegations that the payments were large and unjustified were plausible.
Therefore, Judge Orrick held that plaintiffs plausibly alleged that the settlement terms were large and unreasonable, enough to support plaintiffs' claim at the motion to dismiss stage.