In one of the first cases to apply the United States Supreme Court’s landmark decision in FTC v. Actavis, Inc., 133 S. Ct. 2223 (June 17, 2013), to a “pay-for-delay” pharmaceutical patent litigation settlement, the United States District Court for the District of New Jersey held on January 24, 2014 that a settlement must provide for a monetary “reverse payment” to the generic firm to warrant antitrust scrutiny. In re: Lamictal Direct Purchaser Antitrust Litig., No. 12-cv-995. Specifically, the court ruled that a promise by the branded manufacturer that it will not market its own “authorized” generic in competition with the generic firm’s product does not, standing alone, constitute a payment. In doing so, the court rejected the position advanced by the Federal Trade Commission, which has argued that a “no-AG” promise functions no different from a straight monetary payment, since it guarantees the generic firm millions in sales upon entry. Lamictal is the first case to declare that Actavis applies only to settlements providing for a payment of money, and also the first to squarely address the no-AG issue.

Background

Generic pharmaceutical companies often challenge patents held by branded pharmaceutical companies. The litigation frequently settles before courts rule on the patent’s validity, with the generic firm agreeing to abandon its challenge to the patent and the branded firm agreeing to allow the generic to enter the market at some point before patent expiration. The settlements often provide for other valuable consideration flowing from the innovator company to the challenger. This sometimes takes the form of a straight cash payment. In other cases, the consideration consists of some other non-monetary benefit, such as an agreement by the branded company not to introduce a competing “authorized” generic (a “no-AG” promise).

Critics, especially the Federal Trade Commission, have long derided these settlements as agreements not to compete. In their view, the payment is made in exchange for the generic firm’s agreement to stay off the market—hence the moniker “pay for delay.” Prior to the Supreme Court’s decision last June in FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013), most courts of appeals had upheld these arrangements as lawful exercises of patent rights—even settlements providing for cash payments of hundreds of millions of dollars.

In Actavis, the Supreme Court held that “reverse payments” should be reviewed under a “rule of reason” analysis to determine whether the underlying agreements violate the antitrust laws. But the Court declined to state clearly what constitutes a reverse payment. The opinion suggests that the Court had in mind a payment of money: the underlying facts involved a large cash payment, and the Court repeatedly spoke of payments in financial terms. Indeed, the opening paragraph of the decision describes reverse payment settlements as those where “A, the plaintiff, pays money to defendant B purely so B will give up the patent fight.” Id. at 2233.

Lamictal

GlaxoSmithKline LLC (GSK) sells Lamictal® pharmaceutical products for the treatment of epilepsy and bipolar disorder. GSK’s patent for the active ingredient expired in July 2008. Prior to that date, GSK’s domestic revenue from its Lamictal® products exceeded $2 billion per year. In 2002, Teva Pharmaceutical Industries Ltd. and Teva Pharmaceuticals (Teva) filed an Abbreviated New Drug Application (ANDA) to market a generic version of Lamictal®. As the first generic filer, Teva would be entitled under Hatch-Waxman to a 180-day period in which it would be the only generic manufacturer authorized to market the drug. In response to Teva’s ANDA, GSK sued Teva for patent infringement. In January 2005, that court ruled that claim 1 of the patent was invalid as anticipated by prior art. Less than one week later, the parties announced that they were in settlement negotiations, and soon settled their patent lawsuit.

In exchange for dropping its challenge to GSK’s patent, the final settlement allowed Teva, under a license from GSK, to market its generic product for approximately six months before the patent expired. The license was a wholly exclusive one, even as to GSK. GSK thus agreed not to launch its own authorized generic (AG) versions of Lamictal® during Teva’s 180-day exclusivity period, thereby ensuring that Teva would not face generic competition during its first six months on the market.

The plaintiffs, a purported class of direct purchaser plaintiffs (pharmaceutical wholesalers), alleged that the settlement violated federal antitrust laws. In 2012—before the Supreme Court’s decision in Actavis— the federal district court dismissed the complaint on the ground that the settlement did not contain a “reverse payment,” because there was no alleged transfer of money from GSK to Teva. See In re: Lamictal, No. 12-cv-995, 2012 WL 6725580 (D.N.J. Dec. 6, 2012). The plaintiffs appealed, and in February 2013, the United States Court of Appeals for the Third Circuit stayed the proceedings pending the Supreme Court’s decision in Actavis.

Following the Supreme Court’s decision, the Third Circuit remanded the case to the district court, which reconsidered the motion to dismiss in light of Actavis. Judge Walls read Actavis to require application of a three-part test. In the first two steps, the court determines whether the rule of reason applies by asking whether there was a reverse payment, and if so, whether that reverse payment was large and unjustified. If the answer to those questions is yes, the rule of reason applies.

Plaintiffs argued that the settlement contained a reverse payment because GSK’s agreement to refrain from marketing an AG “conferred substantial financial benefits on Teva.” In re: Lamictal Direct Purchaser Antitrust Litig., No. 12-cv-995, Slip Op. at 13 (D.N.J. June 24, 2013). The court rejected that argument, reasoning that “nothing in Actavis says that a settlement contains a reverse payment when it confers substantial financial benefits or that a no-AG agreement is a payment.” Id. Noting that “[b]oth the majority and dissenting opinions reek with discussion of payment of money,” the court held that by “reverse payment,” the Supreme Court meant “an exchange of money.” Id. at 13-16.

The court acknowledged that two other district courts have concluded that Actavis applies to non- monetary consideration. But Judge Walls found those decisions to be unpersuasive because they “are unsupported by the words of Actavis or are inapposite.” Id. at 16-17. In In re Lipitor Antitrust Litigation, No. 12-cv-2389 (D.N.J. Sept. 5, 2013), Judge Sheridan, also sitting in the District of New Jersey, concluded that “nothing in Actavis strictly requires that the payment be in the form of money.” Id. at 16. Because that ruling was in the context of plaintiffs’ motion to amend their complaint in light of Actavis,” however, Judge Walls dismissed it on the ground that it was “more like a request for further briefing than a decision.” Id. The court disregarded language from a District of Massachusetts case, In re Nexium

(Esomeprazole) Antitrust Litigation, No. 12-md-02409 (Sept. 11, 2013), calling it dictum because the settlement there involved both a no-AG promise and cash.

Judge Walls acknowledged that it is “plausible” that Actavis does not require a payment of money. Id. at 18. The court accordingly went on to consider the settlement under the “five considerations” of Actavis, and determined “that the settlement would most likely survive” that analysis. Id. The court found that the settlement did not have the potential for genuine adverse effects on competition because Teva was allowed to enter six months early, there was no payment of money, and “the duration of the no-AG Agreement was a relatively brief six months.” Id. Notably, the court found that to the extent that the no- AG promise was a payment, it was justified even though “the value to Teva of the No-AG Agreement likely exceeds what the parties would have spent litigating the patent dispute.” Id. The court reasoned that “consideration which the parties exchanged in the settlement is reasonably related to the removal of the uncertainty created by the dispute.” Id. Parties to these settlements and many academics have long stressed that avoiding risk is a valid justification for making a payment, and have criticized detractors for ignoring this factor. The court’s recognition of this consideration is therefore significant.

Conclusion

This is not the last word on the settlement at issue in Lamictal. On January 27, 2014, the plaintiffs advised the district court that they intended to appeal to the Third Circuit. That Circuit is viewed as hostile to reverse payment settlements. In In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2013), since vacated by Actavis, the court departed from most courts of appeals and applied a strict “quick look” level of scrutiny to reverse payment settlements. But the Third Circuit, much like the Supreme Court in Actavis, focused on settlements in which “money . . . changed hands.” Id. at 218. Given that Actavis repeatedly describes reverse payment settlements in monetary terms, reversal is not a sure thing.