The Third Circuit’s recent product-hopping decision in Mylan Pharm. Inc. v. Warner Chilcott Pub. Ltd. Co (“Doryx”)[1] has been widely criticized by commentators as breaking with established antitrust precedent. Mylan, the last remaining plaintiff in the case following a series of settlements at the district court level, has petitioned for rehearing, which both the Federal Trade Commission (“FTC”) and American Antitrust Institute (“AAI”) agree is warranted in light of potential harm to consumers.

Regardless of whether en banc review is granted, the Doryx opinion recognized that product hopping in the face of a “patent cliff” can constitute conduct in violation of the antitrust laws.[2] A “patent cliff” occurs when the patents protecting the exclusivity of a branded drug expire, and the branded drug company has an incentive to protect its monopoly by product-hopping, rather than allow its revenue to “fall off a cliff” upon generic entry into the market. The Third Circuit’s recognition of these incentives to block competition leaves the door open for consumers to prevail in product-hopping cases.

Background

In the pharmaceutical industry, the Drug Price Competition and Patent Term Restoration Act, more commonly known as the Hatch-Waxman Act, governs generic drug regulation, and provides a limited market exclusivity period for new brand name drugs. The exclusivity period is often tied directly to the branded drug’s patent life, allowing for generic market entry upon the patent’s expiration. However, if the Hatch-Waxman Act’s regulatory scheme is effectively manipulated by drug manufacturers, the exclusivity period of branded drugs can be extended, which also extends monopoly pricing of the drug to the detriment of consumers. The antitrust laws have historically played a vital role in protecting the legal right of generic drug competitors to come to market.

On September 28, 2016, the Third Circuit affirmed the district court’s summary judgment dismissal of Mylan’s antitrust action in Doryx. The underlying facts involved the sale of Doryx, the name-brand version of an oral antibiotic used to treat severe acne. Among other antitrust theories, Mylan contended that the drug manufacturer defendants conspired to preserve their market power through product-hopping. The Hatch-Waxman Act allows generic manufacturers to “piggy-back on a brand drug’s scientific studies,” which should in theory drive drug competition.[3] In order to do so, however, the generic manufacturer must establish bioequivalency to the name-brand drug.[4] Consequently, “product-hopping” can occur when a defendant manufactures “various insignificant modifications to a drug to keep generic competitors out of the market by forcing them to re-enter a cumbersome regulatory approval process.”[5]

The Doryx panel affirmed dismissal largely based on a finding that Mylan failed to provide sufficient evidence of market power in the relevant market,[6] despite the fact that Mylan’s methods of proving market power had generally been considered reliable prior to the Doryx decision.

In then holding that the defendants’ alterations to the product did not violate the antitrust laws, Judge Fuentes carefully limited the panel’s holding, explaining, “To be clear, we do not rule out the possibility that certain insignificant design or formula changes, combined with other coercive conduct, could present a closer call with respect to establishing liability in future cases.”[7] Acknowledging our judicial system’s important role in “[protecting] consumers and [ensuring] fair competition under the antitrust laws,” Judge Fuentes emphasized that the disposition in every individual case turns on the facts and circumstances presented by the defendant’s alleged anticompetitive conduct.[8]

Why Rehearing is Warranted

Following the panel’s adverse ruling, Mylan petitioned the full Court to rehear the case. Mylan’s Petition for Rehearing focused on the panel’s “formulistic, non-economic approach to market definition and monopoly power analysis,” arguing that it directly conflicted with Hershey,[9] a Third Circuit opinion issued one day earlier, along with multiple Supreme Court and appellate decisions “mandating an economic approach” to antitrust cases. For example, the Hershey panel applied the hypothetical monopolist test to define the relevant market, which focuses on the set of products that imposes an actual constraint on competitors’ pricing.[10] Mylan further argued that rehearing is necessary to correct the Doryx panel’s analysis of the conduct at issue, which it contended conflicted with Second Circuit and D.C. Circuit decisions holding that the combination of withdrawing a successful drug from the market and introducing a reformulated version without a legitimate business justification impedes generic competition in violation of Section 2 of the Sherman Act.[11]

The possibility of en banc review increased on October 19, 2016, when the FTC and AAI both submitted amicus briefs in support of Mylan’s Petition for Rehearing. The two amici agreed that at “a time when the high cost of prescription drugs is a growing national problem,” the Doryx panel’s “forgiving” treatment of drug manufacturers could result in real harm to consumers. Indeed, empirical research reveals that “the annual consumer welfare losses from anticompetitive product hopping” amount to “tens of billions of dollars a year.”[12]

In its Amicus Brief, the FTC reiterated Mylan’s concerns that the Doryx opinion directly conflicted with established antitrust law, muddying the waters for future actions. The FTC reminded the Third Circuit of the agency’s commitment to ensuring consumers benefit from the entry of generic drug competition, claiming its hard work paid off for consumers in savings of $239 million in 2013 alone, an impressive feat for the “independent agency charged with promoting a competitive marketplace and protecting consumer interest.”[13] Specifically, the FTC asked the Third Circuit to reaffirm existing law that monopoly power can be proven in a variety of ways, including proof that a defendant’s conduct blocked generic entry that would have caused a decrease in prices,[14] or evidence demonstrating that the conduct would in fact be irrational if the defendant lacked monopoly power.[15] Quoting Justice Breyer, the FTC’s Amicus Brief stressed that “the ultimate purpose of the monopoly power inquiry is to determine whether the conduct at issue makes a ‘real world difference’ to consumers.”[16] The amici also supported Mylan’s argument that the Doryx panel incorrectly focused on the effect the defendant’s exclusionary conduct had on Mylan specifically rather than its overall impact on competition.[17] The AAI submitted similarly robust arguments in support of en banc review, relying on many of the same cases as Mylan and the FTC.

The Future of Product-Hopping Cases in the Third Circuit

Despite the claimed legal errors identified by Mylan and the amici, in explaining why the specific facts presented in Doryx failed to trigger relief, the panel narrowed its holding and described a clear path to success for plaintiffs in future product-hopping cases. Judge Fuentes suggested that the existence of a patent cliff in conjunction with a product alteration could be indicative of anticompetitive conduct, “especially when a defendant’s actions are paired with weak or inconsistent evidence of procompetitive justifications.”[18]

Specifically, the panel compared the facts in Doryx to a recent Second Circuit case where the defendants attempted to avoid a patent cliff by introducing changes to their product that were designed to extend the patent exclusivity period and block generic entry.[19] Contrasting that scenario with the facts before them, the Doryx panel found that “there were no patent cliffs on the horizon, and the evidence demonstrates that there were plenty of other competitors already in the oral tetracycline market,” ultimately concluding that Mylan failed to produce sufficient evidence of anticompetitive conduct.[20]

Thus, although rehearing of the Doryx panel’s decision is warranted to ensure the consistent application of antitrust precedent, it is clear that product-hopping remains a viable theory of anticompetitive harm in the Third Circuit, particularly in cases alleging that the defendant hoped to evade or postpone the inevitable financial consequences incurred following expiration of a patent due to the corresponding market entry of generic competitors.