Antitrust Law Daily Wrap Up, TOP STORY—D.N.J.: Narrow reading of Supreme Court’s “pay-for-delay” analysis dooms challenge to non-monetary patent settlement agreement, (Jan 27, 2014)

By Jeffrey May, J.D.

The U.S. Supreme Court’s recent determination that a “rule of reason” standard applies when scrutinizing so-called “reverse payment settlements” between a brand name and generic drug manufacturer did not resuscitate an antitrust challenge to the terms of a non-monetary settlement agreement resolving patent infringement litigation between drug companies related to the pharmaceutical lamotrigine, a federal district court in New Jersey has decided. Following remand from the Third Circuit in light of the Supreme Court’s decision in FTC v. Actavis, Inc. (133 S. Ct. 2223, 2013-1 Trade Cases ¶78,419), the court confirmed its earlier decision to dismiss for failure to state a claim (In re Lamictal Direct Purchaser Antitrust Litigation, January 24, 2014, Walls, W.).

The action was brought by purchasers of lamotrigine, which is used to treat medical conditions such as epilepsy, bipolar disorder, and other disorders involving seizures. It also has several off-label uses.

GlaxoSmithKline LLC (GSK) holds the patent for lamotrigine, which is marketed under the brand Lamictal. Teva, a generic pharmaceutical company, sought Food and Drug Administration approval to market a generic version of Lamictal. GSK sued Teva for patent infringement. After three years of litigation, the parties settled in 2005. Under the settlement, in exchange for dropping its challenge to GSK’s patents, Teva was allowed to market generic lamotrigine before the relevant patent expired and ensured that once it did so, its generic tablets and chewables would not face competition from GSK’s own “authorized generic” for a certain period of time. The plaintiffs alleged that the terms of that settlement between GSK and Teva violated federal antitrust law.

The district court had previously held that, because the challenged settlement did not involve a transfer of money, it was not subject to antitrust scrutiny. In ruling on that motion, the district court had applied the Third Circuit’s “quick look” test, which was explicitly rejected by the Supreme Court. In light of the remand, the court engaged in a “reconsideration of Defendant’s motion to dismiss in the presence of Actavis’s authority.”

The Supreme Court’s decision in Actavis established a three-part test for antitrust scrutiny of patent settlement agreements, the district court explained. The first two steps, which determine when to apply the rule of reason, are followed by an application of the rule of reason to the scenario.

In Step One, a district court must determine whether there is a reverse payment, based on what the parties exchanged in the settlement and whether it included money. In Step Two, a district court must ask whether the reverse payment is large and unjustified, since only certain reverse payments actually warrant scrutiny. Finally, a court would reach Step Three to determine whether the parties to an agreement creating a restraint of trade had market power and exercised it, whether the restraint had anticompetitive consequences, and whether those consequences were otherwise justified.

The court rejected the contention that Actavis did not require a preliminary finding of a “reverse payment.” The analysis only applied to settlements that contained reverse payments and the challenged settlement did not include such a payment. Other types of settlement were explicitly exempt, in the court’s view.

Moreover, the court did not define “payment” in a way that included non-monetary transfers of value. The plaintiffs argued that the challenged settlement amounted to a “reverse payment” because it “conferred substantial financial benefits on Teva.” The court refused to “extend the holding of Actavis to the non-monetary facts before it.” In addition, the court found other district court decisions holding that Actavis applied to non-monetary patent settlements unsupported and unpersuasive.

In any event, because it was plausible that Actavis did not require finding a large, unjustified reverse payment of money, the court considered the settlement under the High Court’s “five considerations” to guide district courts in applying the rule of reason in this context. The court considered: (1) whether the conduct had the potential for genuine adverse effects on competition; (2) whether the “payment” approximated litigation expenses or compensated the patent challenger for other services; (3) whether the brand name manufacturer’s market power could bring about anticompetitive harm; (4) whether the sweep of the settlement suggested an intent to maintain supracompetitive prices and serve as a “workable surrogate for a patent’s weakness”; and (5) whether the parties had settled in some way that did not involve the use of reverse payments. Under those factors, the court found that the settlement was reasonable.

The case is No.12-CV-00995 (WHW).

Attorneys: Elena K. Chan (Garwin Gerstein & Fisher LLP) for Louisiana Wholesale Drug Co., Inc. Melissa J. Hatch (Pepper Hamilton LLP) for GlaxoSmithKline LLC. Michael E. Patunas (Lite DePalma Greenberg, LLC) for Teva Pharmaceutical Industries Ltd.

Companies: GlaxoSmithKline LLC; Teva Pharmaceutical Industries Ltd.

MainStory: TopStory Antitrust NewJerseyNews