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King Drug Decision May Be A Turning Point In Pay-For-Delay
August 7, 2015
By Andrew S. Wellin
Law360, New York (August 7, 2015, 2:07 PM ET) --
Recently, the Third Circuit issued the first federal appellate decision
interpreting the landmark decision inv. Actavis Inc.[1], potentially greatly expanding the
scope of liability for settling parties in reverse payment cases.
The Third Circuit held in King Drug Co. of Florence Inc. v. Smithkline
Beecham Corp. that a pioneer drug manufacturer's agreement not to
market an authorized generic product during a generic challenger's
180-day exclusivity period to settle litigation under the Hatch-Waxman
Act is subject to rule of reason scrutiny under the Sherman Act.[2] This
is significant because post-Actavis the district courts have reached
conflicting determinations as to whether noncash compensation, such
as the "no-AG" deal in King Drug, constitutes an illegal reverse
payment.[3] So-called "reverse payments" occur when a pioneer drug
manufacturer pays the alleged generic infringer to drop its patent
challenge and delay its market entry. King Drug is the first word from
the federal appellate judiciary and thus may serve to greatly expand
the scope of liability for settling parties if courts outside the Third
Circuit follow its lead.
The dispute in King Drug centers around
challenge to the validity of patents covering the active ingredient of its drug Lamictal, a medicine used to treat epilepsy, and Teva's plans to market its own generic version of Lamictal. To increase generic pharmaceutical competition, the Hatch-Waxman Act[4] provides generic manufacturers with unique incentives to challenge the patent protection accorded to pioneer drugs. Instead of requiring detailed studies demonstrating efficacy and safety, the act permits generic challengers to "piggyback" on the pioneer drug manufacturer's studies using an abbreviated new drug application, so long as the generic challenger demonstrates bioequivalence.[5] And, most importantly, the U.S.grants the first successful ANDA filer a 180-day exclusivity period during which time other generic challengers are not permitted to market the drug.[6] The 180-day exclusivity period can be extraordinarily valuable to the generic challenger. However, in order to market a generic drug, a generic challenger must first overcome the pioneer manufacturer's patent monopoly. The most common form of Hatch-Waxman challenge is known as a Paragraph IV certification. Under Paragraph IV, the generic manufacturer certifies that the pioneer's patents are "invalid or will not be infringed by the manufacture, use, or sale of the [generic] drug."[7] In almost all cases, a Paragraph IV certification provokes patent infringement litigation by the pioneer manufacturer because certification is an act of constructive infringement and the initiation of litigation triggers a 30-month stay of the FDA's consideration of the ANDA application.[8] In King Drug, Teva filed the first ANDA challenging GSK's patent on Lamictal and certified that its generic product did not infringe the patent and/or the patent was invalid under Paragraph IV.[9] In early 2005, the district court adjudicating the claims of noninfringement and invalidity ruled that the patent's primary claim was invalid.[10] Before the court could rule on the patent's remaining claims, GSK and Teva entered a settlement agreement wherein Teva was permitted to market generic Lamictal beginning in July 2008 and
GSK agreed not to market an authorized generic Lamictal product during Teva's 180-day exclusivity
period.[11] While Teva was entitled to the absence of generic competition by other challengers during its
180-day exclusivity period without the settlement agreement, GSK still would have been permitted to
market its own generic product (an "authorized generic") under the act.
In February 2012, a group of direct Lamictal purchasers sued GSK and Teva in the District of New
Jersey, claiming that the agreement constituted an illegal reverse payment that violated Sections 1 and 2
of the Sherman Act.[12] While the case was pending, the Supreme Court issued its decision in Actavis.
Rejecting the prevailing "scope of the patent test," which held that reverse payment settlements were
immune from antitrust scrutiny so long as generic market entry occurred prior to the expiration of the
challenged patent, Actavis held that reverse payment settlements are subject to rule of reason analysis.
Notwithstanding, because Actavis only analyzed a cash reverse payment, the district court in Lamictal
refused to extend its reasoning to the no-AG deal and dismissed the direct purchasers' complaint.[13]
On appeal, the Third Circuit held that noncash reverse payments are subject to antitrust scrutiny.[14]
Reviewing the five factors the Supreme Court identified in Actavis that favor subjecting cash reverse
payments to antitrust scrutiny, the court found that each applied equally to noncash reverse payments: (1)
the potential for genuine adverse effects on competition; (2) the likelihood that anti-competitive
consequences will at least sometimes prove unjustified; (3) the fact that the patentee likely possesses the
power to cause anti-competitive harm; (4) that the size of the unexplained reverse payment can provide a
workable surrogate for a patent's weakness; and (5) the fact that the parties may be able to find other
ways to settle the infringement litigation.[15]
The Third Circuit explained that "no-AG agreements are likely to present the same types of [anti-
competitive] problems as reverse payments of cash."[16] "[A] brand's commitment not to produce an
authorized generic means that it must give up the valuable right to capture profits in the new two-tiered
market. The no-AG agreement transfers the profits the patentee would have made from its authorized
generic to the settling generic — plus potentially more, in the form of higher prices, because there will
now be a generic monopoly instead of a generic duopoly."[17] According to the court, if the drug pioneer
induces the generic to abandon the patent fight using such valuable noncash consideration, "the chance
of dissolving a questionable patent vanishes (and along with it, the prospects of a more competitive
market)."[18] Because the key inquiry under Actavis is whether the "'the payment's objective is to
maintain supracompetitive prices to be shared among the patentee and the challenger rather than face
what might have been a competitive market,'"[19] the court reasoned that the form of reverse payment
consideration is not determinative.
While the number of courts that follow King Drug outside of the Third Circuit remains to be seen, it is clear
that the decision exposes pharmaceutical manufacturers to significant liability from private antitrust
plaintiffs claiming that the parties entered into a noncash reverse payment settlement. Private litigants
often have the ability to forum shop and numerous pharmaceutical manufacturers have facilities in the
Third Circuit. We expect an uptick in antitrust case filings in the Third Circuit challenging reverse payment
settlements. Even the FTC, which has objected consistently to noncash reverse payment settlements well
prior to the decision in King Drug, may opt for the Third Circuit as a friendly venue for its own enforcement
proceedings.
—By Andrew S. Wellin,
is an associate in Proskauer's New York office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
[1] 133 S. Ct. 2223 (2013).
[2] King Drug Co. of Florence Inc. v. Smithkline Beecham Corp., 2015 U.S. App. LEXIS 10859 (3d Cir. Jun. 26, 2015). [3] See, e.g., In re Niaspan Antitrust Litig., 42 F. Supp. 3d 735 (E.D. Pa. 2014); In re Effexor XR Antitrust Litig., 2014 U.S. Dist. LEXIS 142206 (D.N.J. Oct. 6, 2014); In re Loestrin 24 FE Antitrust Litig., 2014 U.S. Dist. LEXIS 123322 (D.R.I. Sep. 4, 2014); In re Nexium (Esomeprazole) Antitrust Litig., 986 F. Supp. 2d 367 (D. Mass. 2013). [4] 21 U.S.C. § 355, et seq. [5] 21 U.S.C. § 355(j). [6] 21 U.S.C. § 355(j)(5)(B)(iii), (iv). [7] 21 U.S.C. § 355(j)(2)(A)(vii)(IV). [8] 35 U.S.C. § 271(e)(2)(A); 21 U.S.C. § 355(j)(5)(B)(iii). [9] King Drug, 2015 U.S. App. LEXIS 10859, at *14. [10] Id. [11] Id. at *14-15. [12] Id. at *17. [13] In re Lamictal Direct Purchaser Antitrust Litig., 2014 U.S. Dist. LEXIS 9257, at *24-25 (D.N.J. Jan. 24, 2014). [14] King Drug, 2015 U.S. App. LEXIS 10859, at *32 ("We do not believe Actavis's holding can be limited to reverse payments of cash."). [15] Id. at *29-32. [16] Id. at *34. [17] Id. at *36. [18] Id. [19] Id. at *21 (quoting Actavis, 133 S. Ct. at 2236).

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