Last week a federal judge in Massachusetts largely denied a series of motions seeking dismissal of various “pay-for-delay” claims brought by direct and indirect purchasers involving AstraZeneca's acid reflux drug Nexium. Although certain federal and state claims were trimmed on statute of limitation grounds, U.S. District Judge William Young let stand the core claims of the suit based on the alleged continuing harm flowing from the agreements. This ruling comes just months after the Supreme Court's long-awaited decision in FTC v. Actavis and is one of the first times a court has applied the rule of reason analysis as articulated by the Court. Significantly, in his ruling Judge Young adopted a view strongly urged by the FTC (see amicus briefs here and here), that so-called “No-AG” provisions can be viewed as “reverse payments.”

The agreements at issue settled patent litigation filed by AstraZeneca in November 2005 after Ranbaxy notified AstraZeneca that it intended to market generic versions of Nexium. As part of its Abbreviated New Drug Application (ANDA), Ranbaxy included a so-called "Paragraph IV" certification that the commercial manufacture, use, and/or sale of any generic Nexium product would not infringe any of AstraZeneca's valid patents. The Ranbaxy ANDA filing was followed soon after by ANDA filings by Teva and Dr. Reddy's and additional patent suits filed by AstraZeneca against each.

In April 2008, AstraZeneca and Ranbaxy settled the patent litigation. Under the terms of the agreement, Ranbaxy agreed to delay the launch of its generic Nexium product until May 2014. AstraZeneca also granted Ranbaxy an exclusive license (even as to AstraZeneca) to act as AstraZeneca's supplier of Nexium and authorized generic (AG) distributor of two other AstraZeneca drugs. According to the allegations, this license also would have had the effect of preventing AstraZeneca from marketing its own AG version of Nexium during the 180-day exclusivity period Ranbaxy would have enjoyed as a result of being the first generic firm to file an ANDA. Plaintiffs allege that these two provisions constitute so-called "No-AG" agreements that serve as a form of compensation from the brand manufacturer to the generic. Later, AstraZeneca also settled with Teva and Dr. Reddy's, both of which had begun manufacturing generic versions of Nexium "at risk," which meant that both firms faced contingent liability to AstraZeneca if the AstraZeneca patents were later held to be both valid and infringed by the Teva and Dr. Reddy's products. Under the terms of the Teva and Dr. Reddy's agreements, the generic firms agreed to delay launch of their products until May 2014 and AstraZeneca agreed to forgive a significant portion of the contingent liabilities of Teva and Dr. Reddy's.

Legality of Reverse Payment Agreements after Actavis

In holding that the plaintiffs had alleged facts sufficient to establish harm to competition arising from the agreements, Judge Young explained that "Actavis added an additional gloss to standard antitrust-injury analysis" in that "only those reverse payment agreements whose anticompetitive consequences are sufficiently great and sufficiently unrelated to the settlement of a particular patent dispute will be censured by the courts." According to Judge Young, plaintiffs alleged several facts which together would be sufficient to meet this standard, namely that:

  • AstraZeneca agreed to pay over US$1 billion to Ranbaxy through the various arrangements provided for in the agreement, including the so-called "No-AG" provisions;
  • AstraZeneca forgave contingent liabilities faced by Teva and Dr. Reddy's in relation to drugs other than those at issue in the patent litigation;
  • the agreement with Ranbaxy would have created a bottleneck preventing generic entry even when Ranbaxy would not market its generic product until 2014;
  • each of the generic firms had a pattern of launching "at-risk" products in the past, suggesting that they would have entered the market absent the agreements; and
  • no evidence was presented demonstrating countervailing procompetitive benefits from the agreements.

In a particularly significant part of the ruling, Judge Young expressly endorsed the FTC's broad interpretation of the term "payment" that even non-monetary forms of payment can provide the basis for anticompetitive reverse payment agreements. "Nowhere in Actavis did the Supreme Court explicitly require some sort of monetary transaction to take place for an agreement between a brand and generic manufacturer to constitute a reverse payment" and, in fact, adopting a broader understanding of the concept of a payment better "serves the purpose of aligning the law with modern-day realities."

Market Definition

Judge Young also endorsed the relevancy of narrow pharmaceutical product markets limited to a single active ingredient. Rejecting arguments from the defendants that the relevant market should include other drugs that are similar in chemical composition or that are used to treat comparable medical conditions, Judge Young held that "[ t ]he reasonable interchangeability of a set of products is not dependent on the similarity of their forms or functions" but is instead determined by the cross-elasticity of demand for the product in question. Accordingly, the relevant market alleged by plaintiffs—consisting only of brand Nexium and generic equivalents also sharing its active ingredient—was plausible. Ultimately, however, Judge Young held that extensive consideration of the relevant market was unnecessary because the plaintiffs had also alleged direct evidence of market power in that AstraZeneca, "in its position as a monopolist, had been able to charge supracompetitive prices for brand Nexium."

Statute of Limitations

Despite granting dismissal of direct purchasers' claims based on the AstraZeneca/Ranbaxy agreement as time-barred because the claims were brought more than four years after execution of the agreement, Judge Young relied upon the continuing-violation exception to preserve claims based on sales of Nexium within the limitations period in which consumers were overcharged for brand Nexium. Judge Young acknowledged that courts are generally reluctant to invoke the continuing-violation exception absent allegations of overt acts separate and apart from the initial act giving rise to the original injury, but emphasized the Second Circuit's observation in Berkey Photo that "a purchaser…is not harmed until the monopolist actually exercises its illicit power to extract an excessive price." Therefore, so long as a monopolist continues to use its power to overcharge consumers, it remains liable for those continuing acts during the limitations period.

Conclusion

This decision is likely to be just the first of many rulings that will attempt to define the contours of the Supreme Court's ruling in Actavis. Indeed, as demonstrated by Judge Young's ruling, numerous questions remain to be settled with respect to pharmaceutical patent settlement agreements. In particular, the issue of the applicability of Actavis to agreements involving only non-monetary forms of payment, such as No-AG provisions, is set to be examined by other courts in the coming weeks and months. As more courts consider and weigh in on these issues, potentially with alternative approaches, it will be important to carefully consider and evaluate potential patent settlement agreements until the law is further clarified.