When does breaching a contract also violate the antitrust laws? On June 9, 2014, a unanimous panel of the Second Circuit affirmed a district court ruling that an alleged monopolist patent-holding drug manufacturer’s alleged breach of an agreement to supply the patented drug to competing manufacturers did not violate Section 2 of the Sherman Act.1

Factual Background

The defendant manufactures and owns the patents covering a widely-prescribed drug used to treat attention-deficit/hyperactivity disorder. Shortly after the FDA approved the distribution of the drug in 2001, generic pharmaceutical companies filed applications to manufacture and sell its generic equivalent. They certified, pursuant to the Hatch-Waxman Act,2  that the generic versions would not infringe the patents involved, or that the patents were invalid. The patent holder responded by bringing patent infringement lawsuits against the generic manufacturers, again pursuant to the Hatch-Waxman Act, which provides an automatic 30-month stay on generics’ FDA applications when the patent holder files an infringement lawsuit.3

The parties settled their patent litigation five years later, in 2006. The settlement provided that the generics would drop their challenge to the patents and stay out of the market for three years, even if their FDA applications were granted before then. In exchange, they would receive licenses to manufacture and sell the drug starting in 2009; or, if their FDA applications were not approved by then, the patent holder would supply the generics with the drug, which they could then sell, unbranded, in the market.4

The Allegations of the Complaint

The plaintiff drug wholesalers in the case before the Second Circuit, alleged that the patent holder breached the settlement agreements just months after they were signed by failing to provide the generics with enough of the product to meet the wholesalers’ needs.5  The wholesalers alleged that this, in turn, caused the price of the generics to rise, and protected the market for the patent holder’s brand – relegating the generics to only 50-60 percent of the market, rather than the 90 percent they expected.6  The wholesaler plaintiffs contended that this breach of the settlement agreements by the patent holder constituted a monopolistic refusal to deal with prospective competitors, foreclosed under Section 2 of the Sherman Act by the Supreme Court’s 1985 decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp.7  In Aspen Skiing, the Supreme Court held that while non-monopolists have the absolute right to refuse to deal with any competitor,  a monopolist cannot so choose when it has a history of prior dealings with that competitor,8 and when ending those dealings resulted in the monopolist’s foregoing of short term profits. (It has long been the law that non-monopolists have an absolute right to unilaterally refuse to do business with competitors).9

Judge Marrero, in the Southern District of New York, granted the patent holder’s motion to dismiss,10  largely relying on the Second Circuit’s decision in In re Tamoxifen Citrate Antitrust Litig.11  Judge Marrero determined that because the terms of the patents were not extended – that is, because the generic manufacturers were not paid to stay out of the market after the applicable patents expired – the Second Circuit’s previous Tamoxifen decision precluded antitrust claims arising out of the agreements.12  He further found that Aspen Skiing did not govern, as the patent holding manufacturer had no obligation to provide any license to the generics whatsoever.

Changes in the Law: Actavis

While this case was on appeal, but before any briefs had been filed, the Supreme Court decidedFTC v. Actavis, Inc.,13  abrogating the Second Circuit’s Tamoxifen decision. The Supreme Court held that even when a patent litigation settlement agreement did not extend the scope of a patent, the agreement could still violate antitrust law due to its potentially significant anticompetitive effects.14  Such agreements, known as “reverse payment” settlement agreements (because despite the patent holder suing for patent infringement, it typically paid the potential infringer to drop its challenge to the patents), must be analyzed using antitrust law's traditional "rule of reason."15

Despite an opening provided by the Supreme Court in Actavis, the wholesaler plaintiffs in the case before the Second Circuit did not re-plead or attack the settlement agreements themselves as violating the Sherman Act. Rather, they argued that the patent holding manufacturer’s act of breaching the settlement agreements, by failing to provide sufficient amounts of the generic, was an impermissible refusal to deal under Aspen Skiing.16

The Second Circuit’s Decision

The Second Circuit made short work of the plaintiffs’ appeal. Citing the Supreme Court’s Trinkodecision, decided after Aspen Skiing,17  it reaffirmed that while Aspen Skiing stands for “the proposition that a business with market power may be subject to a duty to deal with a smaller competitor,” the case “lies at or near the outer boundary of section 2 liability.”18  As characterized in Trinko, the defendant in Aspen Skiing terminated a long-term, voluntary and “thus presumably profitable” course of dealing that “suggested a willingness to forsake short-term profits to achieve an anticompetitive end.”19   And, as the District Court described, despite allegedly gaining the benefit of three years of exclusivity in the market, and “then failing to uphold its end of the supply-chain bargain” – that is, engaging “in the distasteful act of having its cake and eating it too (or, more accurately, hoarding its cake to drive up the cost of the goods and [its] profits)”20  – the patent holder did “not terminate any prior course of dealing.”21  Because it had no obligation to license the patented drug at all, it createdcompetition in the relevant market.22  In short, the Second Circuit concluded, the “mere existence of a contractual duty to supply goods does not by itself give rise to an antitrust duty to deal,” and the complaint did “little more than attach antitrust labels and conclusions to what is, at most, an ordinary contract dispute to which the plaintiffs are not even parties.”23


This decision provides yet another illustration of the limits of Aspen Skiing. When bringing their claim, the wholesaler plaintiffs faced, on the one hand, the limits of the Second Circuit’s earlier decision in Tamoxifen, which essentially precluded challenging the reverse-payment settlement agreement on antitrust grounds, and on the other hand, the well-known limitations on Aspen Skiing’s prohibition of certain monopolist refusals to deal with a competitor. The Supreme Court may have provided a slight opening by abrogating Tamoxifen in its Actavis decision, but even then, because the patent holder was not alleged to have paid the generics to stay out of the market, it is unlikely Actavis would have created liability. The plaintiffs turned to the principles set forth in Aspen Skiing for relief, and found the Second Circuit unwilling to extend its holding.