On Wednesday, January 28, in King Drug Company of Florence, Inc. v. Cephalon, Inc. (In re Modafinil), the US District Court for the Eastern District of Pennsylvania held that FTC v. Actavis, 133 S. Ct. 2223 (2013), does not require plaintiffs in an antitrust case challenging a brand-generic patent litigation settlement to meet any sort of “threshold burden” of establishing that a large reverse payment is unjustified to trigger analysis under the antitrust rule of reason. In so holding, the court arguably shifted to defendants the burden of establishing a justification for any reverse payment made.

Defendant Cephalon, Inc., the manufacturer of branded Provigil, had brought patent litigations against several generic manufacturers after those manufacturers filed Abbreviated New Drug Applications challenging the validity and enforceability of the Provigil patent. Cephalon ultimately entered into settlement agreements with the four generic challengers. Each of the settlement agreements provided that the generic challengers would be entitled to enter the market before expiration of Cephalon’s patent. In addition, pursuant to the settlement agreements, in total, Cephalon has paid approximately $300 million to the generic firms—either for litigation costs or relating to licensing, development or manufacturing agreements.

Plaintiffs in In re Modafinil—the Federal Trade Commission, direct and indirect purchasers of Provigil and a potential generic competitor—sued both Cephalon and the settling generic manufacturers, arguing that the settlement agreements were illegal “reverse payment” settlement agreements under Actavis because Cephalon and the generic challengers knew that Cephalon’s Provigil patent was invalid and unenforceable.

Defendants moved for summary judgment, arguing that plaintiffs had not and could not meet the Actavis threshold burden of establishing that Cephalon had made a large and unjustified payment to the generic challengers. Plaintiffs responded that there was no such threshold burden under Actavis. Rather, plaintiffs insisted that Actavis contemplates a traditional burden- shifting rule-of-reason analysis, and contended that, in any event, whether such a large and unjustified payment existed was a disputed issue of fact.

The court rejected defendants’ position on the burden issue. It found “[m]ost telling” that the Actavis Court never used the term “threshold burden,” although it acknowledged that district courts from other jurisdictions—including one within the Third Circuit—have concluded that the “large and unjustified” inquiry is such a threshold inquiry. Those courts, as the Modafinil court summarized, found that Actavis requires “a three-step analysis: first, determine whether there is a reverse payment; second, determine if the reverse payment is large and unjustified; and third, apply the rule of reason.” Citing In re Lamictal Direct Purchaser Antitrust Litig., 18 F. Supp. 3d 560 (D.N.J. 2014); In re Loestrin 24 Fe Antitrust Litig., 2014 WL 4368924 (D.R.I. Sept. 4, 2014). The Modafinil court further acknowledged that another court had established a different framework under which, unless plaintiffs establish an affirmative answer to the “large and unjustified” question, “the antitrust analysis ends.” Citing In re Nexium (Esomeprazole) Antitrust Litig., 2014 WL 4370333 (D. Mass. Sept. 4, 2014).

Nevertheless, the Modafinil court established the following framework:

Plaintiffs must present evidence of a large reverse payment as part of their initial burden of demonstrating anticompetitive effects under the rule of reason . . . [and] if Plaintiffs meet this standard, the burden shifts to Defendants to justify the reverse payment as procompetitive. If that occurs, Plaintiffs must then present sufficient evidence so as to raise a genuine dispute of material fact as to whether the reverse payment is unjustified or unexplained.

Put more simply, under the Modafinil court’s framework, plaintiffs bear the burden to establish only that a payment is “large,” to subject a settlement to antitrust scrutiny. If they succeed in doing so, the burden shifts to defendants to establish a legitimate “justification” for it.

Although Actavis is less than perfectly clear on the question, some passages in the majority opinion suggest that the Court meant to exempt settlements with justifiable payments from antitrust scrutiny altogether. For example, the Court stated that “a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects. . . .” Actavis, 133 S. Ct. at 2237 (emphasis added). Elsewhere, the opinion notes that “the payment (if otherwise unexplained) likely seeks to prevent the risk of competition.” Id. at 2236 (emphasis added). There is thus support for the view that plaintiffs must make a preliminary showing that a large payment is unjustified; if they are successful, defendants must provide procompetitive justification for the settlement as a whole.

Moreover, the Cephalon court’s framework sounds a lot like the “quick look” approach that was explicitly rejected in Actavis. There, the FTC urged the Court to adopt a test whereby the presence of a reverse payment “raises a strong presumptive inference that the generic manufacturer has agreed to delay entry beyond the date that would otherwise reflect the parties’ assessment of likely litigation outcomes.” Under the FTC’s approach, the burden would then shift to the settling parties to establish that “the payment was consideration for something other than delay; that it was commensurate with the brand-name manufacturer’s expected litigation savings; or, in rare cases, that unusual business or litigation circumstances supply a procompetitive justification for the agreement.” FTC Brief at 8. The Cephalon framework differs from this only in that it requires plaintiff to show that a payment is “large” before the defendants are required to explain it.

On the question of what constitutes a “large” payment, the Modafinil court agreed with plaintiffs that Actavis instructs that a payment should be considered “large if it exceeded saved litigation costs and a reasonable jury could find that the payment was significant enough to induce a generic challenger to abandon its patent claim.” Applying that standard to the facts before it, the court concluded that the payment was larger than saved litigation costs and that there was a genuine issue of material fact as to whether the size of the payment would have induced  plaintiffs to stay off the market. In addition to expert testimony, the court relied on internal market projections, demonstrating the importance that will undoubtedly be placed on the parties’ own documents in cases going forward.

The court also cited several internal Cephalon documents concerning the timing of generic entry. For example, one document authored by a consultant to Cephalon stated that Provigil “faces the certain prospect of generic competition” before patent expiration. In another, a senior executive announced that by settling the cases “Cephalon was able to secure almost six additional years of exclusivity” by allowing each generic firm to enter three years before patent expiration. The court found that a reasonable jury could infer from these documents that Cephalon considered its patent to be weak.