On October 1, 2014, Judge Gerald Austin McHugh of the US District Court for the Eastern District of Pennsylvania held in Time Insurance Company v. AstraZeneca that state law claims involving an alleged reverse payment settlement could be resolved without litigating the validity of the underlying patents and that there was no federal jurisdiction over the claims ( (E.D. Pa. Oct. 1, 2014)). The court also held that the Supreme Court’s ruling in FTC v. Actavis applied to non-cash reverse payments.

Plaintiffs, health insurance companies who purchased the heartburn drug Nexium on behalf of their members, allege that AstraZeneca and three generic firms violated several states' antitrust laws by entering into reverse payment settlements that resolved patent infringement suits relating to Nexium. Defendants removed the case from state court and intended to consolidate it with a related multidistrict litigation in the District of Massachusetts, In re Nexium (Esomeprazole) Antitrust Litigation, (D. Mass. Sept. 4, 2014). However, Judge McHugh held that the plaintiffs' claims, which were based entirely on state law, did not raise a federal question and remanded the case to the Philadelphia Court of Common Pleas.

Under the challenged settlement agreements, the generic firms agreed:

The plaintiffs alleged that in exchange, AstraZeneca compensated the generic firms by:

Defendants argued that the federal district court had jurisdiction over the claims because the complaint raised a federal question. Specifically, defendants argued that the plaintiffs would have to show that the Nexium patents were invalid under federal patent law in order to prove that:

However, the court found that the plaintiffs could establish these two key elements of their claims without showing that the patents were invalid.

The court noted that Actavis states explicitly that plaintiffs can show that the reverse payment agreements are anticompetitive without litigating the validity of the patent, including by:

Although not addressed by Actavis, Judge McHugh also held that it was possible for the plaintiffs to establish that the reverse payment settlements caused them injury regardless of whether the Nexium patents were valid. For example, the plaintiffs could establish that, if not for the reverse payment settlements, AstraZeneca would have licensed one of the generic firms to sell generic Nexium before the patents expired. Because it was possible for plaintiffs to establish that defendants' conduct injured them without having to litigate the validity of the patents, the court found that the complaint did not create federal jurisdiction on that ground.

The court found that even if the jury ultimately considered the validity of the Nexium patents in reaching a verdict, this did not support a finding of federal jurisdiction. The court noted that a jury verdict that took patent validity into account would not substantially impact federal patent law because it would not:

Judge McHugh held that Actavis applied to the AstraZeneca case even though it involved a non-cash reverse payment. While noting that federal district courts are divided on this issue, the court was persuaded by the two opinions holding that Actavis applies to non-cash reverse payments, issued by another district court in the Eastern District of Pennsylvania and by the court handling In re Nexium (Esomeprazole) Antitrust Litigation involving the same agreements.

Finally, the court rejected defendants' argument that there was federal jurisdiction because plaintiffs' lawsuit, together with another lawsuit filed by the same attorneys in the same court, constituted a mass action under the Class Action Fairness Act (CAFA). Under CAFA, federal courts have jurisdiction over lawsuits with over 100 plaintiffs. However, the court noted that plaintiffs are free to avoid CAFA by filing separate suits that each have fewer than 100 plaintiffs as long as they do not seek to join the suits.

This decision is one of several recent federal district court opinions that have applied Actavis to pending reverse payment settlement cases. It is among the first to consider explicitly the role that patent validity plays in determining antitrust liability. For more information on prior decisions concerning Actavis, see Legal Updates, Supreme Court Issues Decision in Pay-for-Delay Case FTC v. Actavis, District of New Jersey Holds that Actavis Applies Only to Monetary Reverse Payment Settlements, Cash Not Required: EDPA Judge Holds that Actavis Payments Not Limited to Cash, Federal Judge Holds that Actavis Is Not Limited to Cash Payment Settlements and Cash Only: Federal Judge Holds that Actavis is Limited to Monetary Settlement Payments.

For more information on reverse settlements see Practice Note, Reverse Payment Settlement Agreements.