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King Drug Co. of Florence, Inc. v. SmithKline Beecham Corp.

United States Court of Appeals, Third Circuit

June 26, 2015

KING DRUG COMPANY OF FLORENCE, INC.; LOUISIANA WHOLESALE DRUG CO., INC., on behalf of itself and all others similarly situated, Appellants
v.
SMITHKLINE BEECHAM CORPORATION, doing business as GLAXOSMITHKLINE; TEVA PHARMACEUTICAL INDUSTRIES LTD.; TEVA PHARMACEUTICALS

Argued November 19, 2014

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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On Appeal from the United States District Court for the District of New Jersey. D.C. Civil Action No. 2-12-cv-00995. District Judge: Honorable William H. Walls.

Bruce E. Gerstein, Esq. [ARGUED], Kimberly Hennings, Esq., Joseph Opper, Esq., Garwin Gerstein & Fisher, New York, NY; Peter S. Pearlman, Esq., Cohn, Lifland, Pearlman, Herrmann & Knopf, Saddle Brook, NJ, for Appellants.

Donald L. Bell, II, Esq., National Association of Chain Drug Stores, Alexandria, VA; Barry L. Refsin, Esq., Hangley, Aronchick, Segal, Pudlin & Schiller, Philadelphia, PA, for Amicus Curiae National Association of Chain Drug Stores Inc.

Steve D. Shadowen, Esq., Hilliard & Shadowen, Mechanicsburg, PA, for Amicus Curiae 53 Law, Economics, and Business Professors, The American Antitrust Institute and Consumers Union.

Peter Kohn, Esq., Richard D. Schwartz, Esq., Faruqi & Faruqi, Jenkintown, PA; David F. Sorensen, Esq., Berger & Montague, Philadelphia, PA, for Amicus Curiae Professional Drug Company, Inc.

Mark S. Hegedus, Esq. [ARGUED], Federal Trade Commission, Washington, DC, for Amicus Curiae Federal Trade Commission.

Crystal M. Utley, Esq., Office of Attorney General of Mississippi, Consumer Protection Division, Jackson, MS, for Amicus Curiae State of Mississippi, State of Alabama, State of Arkansas, State of Arizona, State of California, State of Connecticut, State of Delaware, State of Hawaii, State of Idaho, State of Illinois, State of Indiana, State of Kentucky, State of Massachusetts, State of Maryland, State of Michigan, State of Minnesota, State of New Hampshire, State of New Mexico, State of New York, State of Nevada, State of Ohio, Commonwealth of Pennsylvania, State of Rhode Island, State of Tennessee, State of Texas, State of Utah, State of Vermont, State of Washington.

Douglas S. Eakeley, Esq., Joseph A. Fischetti, Esq., Lowenstein Sandler, Roseland, NJ; Barbara W. Mather, Esq. [ARGUED], Robin P. Sumner, Esq., Pepper Hamilton, Philadelphia, PA, for Appellee Smithkline Beecham Corporation.

Jonathan D. Janow, Esq., John C. O'Quinn, Esq., Karen N. Walker, Esq., Kirkland & Ellis, Washington, DC; Jay P. Lefkowitz, Esq. [ARGUED], Kirkland & Ellis, New York, NY, for Appellees TEVA Pharmaceutical Industries LTD and TEVA Pharmaceuticals.

Ryan Z. Watts, Esq., Arnold & Porter, Washington, DC, for Amicus Curiae Pharmaceutical Research and Manufacturers of America.

Daniel S. Francis, Esq., Ryan A. Shores, Esq., Hunton & Williams, Washington, DC, for Amicus Curiae National Association of Manufacturers.

Leslie E. John, Esq., Ballard Spahr, Philadelphia, PA, for Amicus Curiae Professor W. David Bradford, University of Georgia, Professor Ian Cockburn, Boston University, Pierre Yves Cremieux, Analysis Group, Inc., Professor Henry G. Grabowski, Duke University, Paul E. Greenberg, Analysis Group, Inc., Professor James W. Hughes, Bates College, George Kosicki, Analysis Group, Inc., Professor Tracy R. Lewis, Duke University, Professor Sean Nicholson, Cornell University, Bruce E. Stangle, Analysis Group, Inc., Sally D. Woodhouse, Cornerstone Research, Professor Michael K. Whoglgenant, North Caroline State University.

Brian T. Burgess, Esq., William M. Jay, Esq., Goodwin Procter, Washington, DC; Christopher T. Holding, Esq., Goodwin Procter, Boston, MA, for Amicus Curiae Generic Pharmaceutical Association.

Before: AMBRO, SCIRICA, and ROTH, Circuit Judges.

OPINION

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SCIRICA, Circuit Judge.

In this appeal from the grant of a motion to dismiss for failure to state a rule-of-reason

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claim under Sections 1 and 2 of the Sherman Act under Federal Rule of Civil Procedure 12(b)(6), we are asked to determine whether FTC v. Actavis, 133 S.Ct. 2223, 186 L.Ed.2d 343 (2013), covers, in addition to reverse cash payments, a settlement in which the patentee drug manufacturer agrees to relinquish its right to produce an " authorized generic" of the drug (" no-AG agreement" ) to compete with a first-filing generic's drug during the generic's statutorily guaranteed 180 days of market exclusivity under the Hatch-Waxman Act[1] as against the rest of the world.

In Actavis, the Supreme Court held that unexplained large payments from the holder of a patent on a drug to an alleged infringer to settle litigation of the validity or infringement of the patent (" reverse payment" ) " can sometimes violate the antitrust laws." Id. at 2227. The Court rejected the near-irrebuttable presumption, known as the " scope of the patent" test, that a patentee can make such reverse payments so long as it is paying potential competitors not to challenge its patent within the patent's lifetime.

Plaintiffs here, direct purchasers of the brand-name drug Lamictal, sued Lamictal's producer, Smithkline Beecham Corporation, d/b/a GlaxoSmithKline (" GSK" ), and Teva Pharmaceutical Industries Ltd. (" Teva" ),[2] a manufacturer of generic Lamictal, for violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. § § 1 & 2.[3] In earlier litigation, Teva had challenged the validity and enforceability of GSK's patents on lamotrigine, Lamictal's active ingredient. Teva was also first to file an application with the FDA alleging patent invalidity or nonenforceability and seeking approval to produce generic lamotrigine tablets and chewable tablets for markets alleged to be annually worth $2 billion and $50 million, respectively. If the patent suit resulted in a judicial determination of invalidity or nonenforceability--or a settlement incorporating such terms--Teva would be statutorily entitled to a valuable 180-day period of market exclusivity, during which time only it and GSK could produce generic lamotrigine tablets. (The relevant statute permits the brand to produce an " authorized generic" during the exclusivity period. Mylan Pharms., Inc. v. United States FDA, 454 F.3d 270, 276-77 (4th Cir. 2006); Teva Pharm. Indus. Ltd. v. Crawford, 410 F.3d 51, 55, 366 U.S.App.D.C. 203 (D.C. Cir. 2005); see also Sanofi-Aventis v. Apotex Inc., 659 F.3d 1171, 1175 (Fed. Cir. 2011).)

After the judge presiding over the patent litigation ruled the patent's main claim invalid, GSK and Teva settled. They

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agreed Teva would end its challenge to GSK's patent in exchange for early entry into the $50 million annual lamotrigine chewables market and GSK's commitment not to produce its own, " authorized generic" version of Lamictal tablets for the market alleged to be worth $2 billion annually. Plaintiffs contend that this " no-AG agreement" qualifies as a " reverse payment" under Actavis because, like the cash reverse payments the Court there warned could face antitrust scrutiny, GSK's no-AG commitment was designed to induce Teva to abandon the patent fight and thereby agree to eliminate the risk of competition in the $2 billion lamotrigine tablet market for longer than the patent's strength would otherwise permit.

We believe this no-AG agreement falls under Actavis 's rule because it may represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition. As the Court noted, these kinds of settlements are subject to the rule of reason.

I.

" A patent . . . is an exception to the general rule against monopolies and to the right to access to a free and open market." Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965) (quoting Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 816, 65 S.Ct. 993, 89 L.Ed. 1381, 1945 Dec. Comm'r Pat. 582 (1945)). The Constitution's " Patent Clause itself reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the 'Progress of Science and useful Arts.'" Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 146, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) (quoting U.S. Const. art. I., § 8, cl. 8). In turn, " [f]rom their inception, the federal patent laws have embodied a careful balance between the need to promote innovation and the recognition that imitation and refinement through imitation are both necessary to invention itself and the very lifeblood of a competitive economy." Id.; see X Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1780a (3d ed. 2011) (" Patent law . . . serves the interests of consumers by protecting invention against prompt imitation in order to encourage more innovation than would otherwise occur." ). A patent, consequently, " is a special privilege designed to serve the public purpose of promoting the 'Progress of Science and useful Arts.'" Precision Instrument Mfg. Co., 324 U.S. at 816.

With the Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 Stat. 1585, commonly known as the Hatch-Waxman Act, Congress attempted to balance the goal of " mak[ing] available more low cost generic drugs," H.R. Rep. No. 98-857, pt. 1, at 14-15 (1984), reprinted in 1984 U.S.C.C.A.N. 2647, 2647-48, with the value of patent monopolies in incentivizing beneficial pharmaceutical advancement, see H.R. Rep. No. 98-857, pt. 2, at 30 (1984), reprinted in 1984 U.S.C.C.A.N. 2686, 2714. The Act seeks to accomplish this purpose, in part, by encouraging " manufacturers of generic drugs . . . to challenge weak or invalid patents on brand name drugs so consumers can enjoy lower drug prices." S. Rep. No. 107-167, at 4 (2002). The resulting regulatory framework has the following four relevant features identified by the Supreme Court in Actavis, 133 S.Ct. at 2227-29.

First, a new drug--that is, a pioneer, " brand-name" drug--cannot be introduced

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until it is approved by the Food and Drug Administration (" FDA" ). 21 U.S.C. § 355(a). A New Drug Application (" NDA" ) requires the applicant to submit, among other things, " full reports of investigations which have been made to show whether or not such drug is safe for use and whether such drug is effective in use," id. § 355(b)(1)(A), as well as comprehensive information about the drug, id. § 355(b)(1). This reporting requirement entails " a long, comprehensive, and costly testing process." Actavis, 133 S.Ct. at 2228.

Second, the Hatch-Waxman Act facilitates the development of generic drugs by allowing an applicant to file, for new drugs shown to be " bioequivalent" to a drug previously approved by the FDA, 21 U.S.C. § 355(j)(2)(A)(iv), a less onerous and less costly " Abbreviated New Drug Application" (" ANDA" ) in lieu of an NDA. See id. § 355(j); Actavis, 133 S.Ct. at 2228. The ANDA process " allow[s] the generic to piggy-back on the pioneer's approval efforts . .., thereby furthering drug competition." Actavis, 133 S.Ct. at 2228 (citing Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 132 S.Ct. 1670, 1676, 182 L.Ed.2d 678 (2012)).[4]

Third, Hatch-Waxman " sets forth special procedures for identifying, and resolving, related patent disputes." Id. A new drug applicant must list information on any patents issued on the drug's composition or methods of use. See 21 U.S.C. § 355(b)(1); Caraco, 132 S.Ct. at 1676. If the FDA approves the new drug, it publishes this information, without verification, in its Orange Book.[5] Caraco, 132 S.Ct. at 1676. In turn, any manufacturer filing an ANDA to produce a generic version of that pioneer drug must consult the Orange Book and " assure the FDA that [the] proposed generic drug will not infringe the brand's patents." Id. [6] As relevant here, the manufacturer may tender that assurance with a " paragraph IV" certification that the relevant listed patents are " invalid or will not be infringed by the manufacture, use, or sale of the [generic] drug." 21 U.S.C. § 355(j)(2)(A)(vii)(IV). But " [f]iling a paragraph IV certification means provoking litigation," Caraco, 132 S.Ct. at 1677, because the patent statute treats paragraph IV certification as a per se act of infringement, see 35 U.S.C. § 271(e)(2)(A).[7] The patentee then has an incentive to sue within 45 days in order to trigger a 30-month stay of the FDA's potential

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approval of the generic " while the parties litigate patent validity (or infringement) in court. If the courts decide the matter within that period, the FDA follows that determination; if they do not, the FDA may go forward and give approval to market the generic product." Actavis, 133 S.Ct. at 2228 (citing 21 U.S.C. § 355(j)(5)(B)(iii)).[8]

" Fourth, Hatch-Waxman provides a special incentive for a generic to be the first to file an Abbreviated New Drug Application taking the paragraph IV route." Id. at 2228-29. From when it first begins marketing its drug or when a court enters judgment finding the challenged patent invalid or unenforceable, the first-filing generic enjoys a 180-day period of exclusivity during which no other generic manufacturer can enter the market. See 21 U.S.C. § 355(j)(5)(B)(iii), (iv).[9] This exclusivity period belongs to first-filing ANDA applicants[10] alone and is nontransferable. See id. § 355(j)(5)(D); Actavis, 133 S.Ct. at 2229. The period does not, however, prevent the brand-patentee ...


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