On October 6, 2014, Judge Peter G. Sheridan of the US District Court for the District of New Jersey adopted in In re Effexor XR Antitrust Litigation a three-step test for valuing reverse payments in reverse payment settlements, also known as pay-for-delay agreements, and held that plaintiffs failed to plead enough reliable facts to sustain a claim ( (D.N.J. Oct. 6, 2014)). Plaintiffs, a proposed class of direct purchasers of the antidepressant Effexor XR, alleged that Wyeth LLC and Teva Pharmaceuticals USA, Inc. entered into a reverse payment settlement in which Teva agreed to delay selling a generic version of Effexor XR in exchange for commitments from Wyeth worth over $500 million. The judge dismissed the reverse payment settlement claims for plaintiffs’ failure to show a reliable value for the alleged reverse payment under a three-step test that the court derived from the US Supreme Court’s analysis in FTC v. Actavis.

Under the 2005 settlement agreement, Teva agreed to refrain from selling generic Effexor XR until two years after the principal patent covering the drug expired. In exchange, Wyeth agreed to:

Wyeth’s commitments not to introduce its own generic versions of Effexor are known as no-authorized-generic or no-AG agreements and, according to plaintiffs, allowed Teva to be the exclusive seller of generic Effexor IR and generic Effexor XR while the no-AG agreements were in effect. Plaintiffs alleged that the no-AG agreements and the Effexor IR license amounted to a reverse payment by Wyeth of over $500 million in exchange for Teva’s agreement not to compete in the Effexor XR market.

The fundamental holdings of Judge Sheridan’s opinion match those in his September opinion dismissing claims in In re Lipitor Antitrust Litigation, including that:

For more information on the Lipitor decision, see Legal Update, Federal Judge Holds that Pay for Delay Plaintiffs Must Allege Value of Non-cash Reverse Payment Settlement.

However, Judge Sheridan expanded on his earlier conclusions in Lipitor and adopted a three-step threshold test for establishing a reverse payment under Actavis, requiring plaintiffs to:

The resulting net payment is the reverse payment.

To establish each step of this test, the court held that plaintiffs must plead facts that have a reliable foundation, such as third-party studies or the knowledge of businesspeople in the pharmaceutical industry. The court also noted that it was not sufficient to analogize values from data concerning other drugs. Ultimately, the court found that the plaintiffs did not plead a reliable foundation for:

Without sufficient facts to calculate each step of the test, the court found that it was unable to determine the three key factors of the Actavis analysis:

Recognizing that Actavis did not provide detailed guidance about how large a payment must be to lead to antitrust liability, the court also held that the payment must be large from the point of view of the patent-holder. The court suggested that one test could be whether the value of the payment represented a large portion of the annual sales of the drug at issue.

The court also held that the FTC’s failure to object to the settlement agreement before it became effective suggested that Wyeth and Teva did not have anticompetitive intent. Under the terms of a pre-existing FTC consent agreement, the reviewing court ordered the FTC to review the settlement agreement for antitrust concerns before entering it as a consent judgment. The FTC did not object to the agreement. Judge Sheridan held that the FTC’s failure to object indicated that:

Although it dismissed the pay-for-delay claims, the court upheld separate claims by the plaintiffs that Wyeth engaged in fraud and sham litigation in order to extend Effexor XR’s patent protection.

This opinion is part of a growing body of district court opinions addressing Actavis. The court’s adoption of a detailed three-step test for valuing a reverse payment is likely to provide welcome guidance to litigants while also setting a difficult standard for plaintiffs at the pleading stage. 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, Federal Judge Holds that Actavis Is Not Limited to Cash Payment Settlements, Cash Only: Federal Judge Holds that Actavis is Limited to Monetary Settlement Payments, EDPA Judge Holds that Patent Law is Not Necessary to Resolve Pay-for-delay Claims and Remands Case to State Court and Federal Judge Holds that Pay for Delay Plaintiffs Must Allege Value of Non-cash Reverse Payment Settlement.

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