First Circuit Boosts Antitrust Challenges To Pay-For-Delay Settlements By Finding Non-Cash Deals Subject To Actavis Scrutiny

By Rosa M. Morales

Antitrust challenges to so-called “pay-for-delay” settlements—in which brand-name drug makers temporarily keep generics out of the market by making payments to would-be competitors—got a booster shot this week with a big victory in the U.S. Court of Appeals for the First Circuit.

The First Circuit held on Monday that even when pay-for-delay settlements do not involve any cash payments, plaintiffs can still challenge those agreements as anticompetitive under the Supreme Court’s landmark decision in FTC v. Actavis, 133 S. Ct. 2223 (2013).  The First Circuit held in In re Loestrin 24 Fe Antitrust Litig., Nos. 14-2071, 15-1250 (1st Cir. Feb. 22, 2016), that the Actavis decision—which permits antitrust challenges to reverse-payment settlements that keep would-be generic competitors out of the market, even if the brand-name drug company holds a patent—is  not limited to agreements for cash payments.

The First Circuit’s decision revived multi-district, direct-purchaser and end-payor class actions brought against drug manufacturers Warner Chilcott, Watson Pharmaceuticals, Inc., and Lupin Pharmaceuticals, Inc., which were consolidated in the U.S. District Court for the District of Rhode Island.  The district court had dismissed claims alleging that the drug makers conspired to delay generic competition of Warner’s blockbuster oral contraceptive drug, Loestrin 24 Fe®, by striking a series of non-cash reverse-payment agreements to settle patent infringement suits, in violation of Section 1 of the Sherman Act, 15 U.S.C. §1.  The First Circuit rejected the district court’s limited reading of Actavis as excluding non-cash payments, vacated that decision, and remanded the case back to district court.

The Reverse-Payment Patent Settlements

Months after Warner obtained U.S. Food and Drug Administration (“FDA”) approval of its patent for Loestrin 24 Fe, Watson became the first to file an Abbreviated New Drug Application (“ANDA”) to market a generic Loestrin, and notified Warner of its Paragraph IV certification that its proposed generic would not infringe Warner’s patent.  Loestrin, 14-2071, at 15.  Warner sued for patent infringement, and right before the statutory 30-month stay on FDA approval expired, the drug makers settled and entered into several non-cash deals, including an agreement by Warner not to launch an authorized generic, in exchange for Watson’s delay in launching its generic until January 22, 2014.  Id. at 15-17.

Six months later, Lupin filed an ANDA for its own generic, and Warner sued for patent infringement.  Id. at 17-18.  The parties settled at the close of discovery and entered into a non-compete agreement.  Id. at 18.  In exchange for Lupin’s agreement to delay launching its generic until July 22, 2014, Warner gave Lupin a non-exclusive license for a different drug, Femcon Fe, and the right to sell a generic version of another drug, Asacol.  Id.

The Antitrust Challenges and First Circuit Appeal

Groups of retailers and employee welfare benefit programs then sued the drug manufacturers for striking anticompetitive reverse-payment settlements that allegedly drove up the price and delayed generic competition of Loestrin.  Id. at 19.  Although “candidly” conceding “significant reservations about its holding,” the district court nevertheless dismissed based on its view of Actavis as applying only to cash payments.  Id. at 21.

The First Circuit disagreed that Actavis is limited to purely cash payments.  Id. 22-23.  Rather, Actavis involved “side deals” in which generics agreed to promote a branded drug “in exchange for multi-million dollar payments from the brand.”  Id. at 24 (quoting Actavis, 133 S. Ct. at 2229).  That fact alone, the Circuit reasoned, demonstrates that the Supreme Court recognized that “a disguised above-market deal, in which a brand manufacturer effectively overpays a generic manufacturer for services rendered,” may mean that reverse payments need not be in cash form.  Id. at 25.

Indeed, the Actavis Court stated that, “in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market,” thereby acknowledging that certain kinds of non-cash reverse payments and other forms of payment in exchange for abandoning patent challenges may unreasonably and unlawfully eliminate competition.  By having “fixated” on cash, the district court “overstate[d] its case” and went against antitrust law’s consistent focus on “substance over form.” Id. (citing Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 191-92 (2010)).  And while Actavis did not explicitly reference payments of cash, the Circuit held that the “key word” referenced throughout is “payment,” and that “connotes a much broader category of consideration than cash alone.”  Id. at 26-27.

– Edited by Gary J. Malone