Third Circuit: Actavis Applies to Non-cash Pay-for-delay Agreements

Practical Law Legal Update 8-616-8206 (Approx. 5 pages)

Third Circuit: Actavis Applies to Non-cash Pay-for-delay Agreements

by Practical Law Antitrust

Background

In Smithkline, plaintiffs alleged that a settlement between defendants Teva Pharmaceuticals and Smithkline (d/b/a GlaxoSmithKline (GSK)) regarding production of a generic version of GSK's profitable drug lamotrigine, or Lamictal, violated:

Section 1 of the Sherman Act, as a conspiracy to delay generic competition for Lamictal tablets.
Section 2 of the Sherman Act, as a conspiracy to monopolize the lamotrigine tablet market.

The terms of the agreement called for Teva to drop its challenge to GSK's lamotrigine patents in exchange for GSK:

Allowing Teva to market generic lamotrigine before GSK's relevant patent expired.
Delaying entry of its own authorized generic form of lamotrigine for 180 days once GSK's patent expired (a no-AG agreement).

In an earlier district court ruling, In re Lamictal Direct Purchaser Antitrust Litigation, the US District Court for the District of New Jersey held that the no-AG agreement did not violate antitrust laws because it did not involve a monetary payment (18 F. Supp. 3d 560 (D.N.J. 2014)). The district court held, in the alternative, that the settlement would survive Actavis scrutiny and was reasonable. For more information on the district court's ruling, see Legal Update, District of New Jersey Holds that Actavis Applies Only to Monetary Reverse Payment Settlements.

On appeal, plaintiffs argued that Actavis should apply to no-AG agreements. Plaintiffs noted that no-AG agreements constitute a valid form of payment because:

Sales of a generic version of Lamictal exceeded $650 million in 2008, and the no-AG agreement gave Teva a valuable monopoly in that market for 180 days.
The agreement protected the $2 billion market for tablet-form generic Lamictal.

Outcome

The Third Circuit held that Actavis applied to defendants' non-cash no-AG agreement because it:

Transferred considerable value from GSK to Teva that could not be justified in terms of saved litigation costs, payment for services or otherwise.
Had anticompetitive consequences potentially as harmful as if there were a cash payment, including that:
- GSK's patent could no longer be challenged or invalidated; and
- a no-AG agreement may have induced the generic entrant to accept an entry date later than it would have otherwise accepted.

The court rejected the defendants' argument that the settlement was protected as an exclusive license under patent law. The court explained that the US Supreme Court in Actavis found that using a patent license to anticompetitively eliminate competition was not immune from antitrust scrutiny, regardless of what kind of licensing is allowed under the Patent Act.

The court also disagreed with defendants' argument that Teva's profits were simply due to early market entry. The court noted that:

Teva would not have had the level of profits it did absent the no-AG agreement, as GSK would have been a generic competitor.
Absent the no-AG agreement, Teva may have been able to enter the market even earlier.

Defendants also argued that:

Public policy favors settlements.
Courts should not review procompetitive conduct in search of an even more procompetitive solution.

The court noted that both of defendants' arguments were rejected by the Supreme Court in Actavis, which noted that:

Anticompetitive considerations outweigh the threat of discouraging settlements.
Regardless of whether the challenged settlement is the most procompetitive solution or not, settlements that anticompetitively delay competition may violate antitrust laws.

Finally, defendants argued that plaintiffs failed to state a claim under Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), which require plaintiffs' allegations to plausibly state a claim on their face. The court held that plaintiffs satisfied the Twombly and Iqbal requirements as they sufficiently pled:

Anticompetitive harm to outweigh any procompetitive benefits of the no-AG agreement.
That defendants acted unlawfully to prevent competition.

The Third Circuit further held that the district court erred by purporting to apply the Actavis rule-of-reason test to the settlement. The panel noted that

It is the role of the factfinder (the jury) and not the court to apply the rule-of-reason analysis at the motion to dismiss stage.
The district court misinterpreted Actavis and applied the wrong set of factors in applying the rule of reason.

On remand, the Third Circuit instructed the lower courts to use the guidance set forth in Actavis to structure rule-of-reason analysis in reverse payment cases, including:

Plaintiff must prove that there was a payment to delay market entry.
Defendant may present legitimate business justifications for the payment.
Plaintiff may rebut defendant's justifications.

This is the first time a court of appeals has ruled on the question of non-cash payments since Actavis was decided. The Federal Trade Commission (FTC) filed an amicus brief in the case in April 2014. For information on other pay-for-delay decisions and pay-for-delay in general, see Practice Note, Actavis Case Tracker and Practice Note, Reverse Payment Settlement Agreements.

Third Circuit: Actavis Applies to Non-cash Pay-for-delay Agreements | Practical Law