Patents, Professional Perspective - Alleged Anticompetitive Patent Practices

Bloomberg Law

07.11.2024

The Federal Trade Commission (FTC) has long been concerned with purportedly anticompetitive patent-related behaviors by pharmaceutical companies. For example, the FTC has suggested that pharmaceutical companies are overly inclusive in their patent listings in the FDA's Orange Book of approved drugs. Similarly, for over a decade, the FTC has opposed so-called reverse payment settlements of patent disputes between branded and generic drug companies. Although these issues are not new, the economic analyses of the antitrust impact of these practices have changed over time. Below, we describe FTC actions and recent court decisions and how they affect the recent state of economic analysis of antitrust impact for these alleged patent practices in the pharmaceutical industry.

The Hatch-Waxman Act & The Importance of Patents In The Pharmaceutical Industry

Innovative pharmaceutical firms invest substantial sums in developing new treatments. Recent estimates suggest the median cost to develop a new drug is $1.1 billion. Pharmaceutical firms use patents to protect these investments, since patent protection provides exclusivity for 20 years after the date of filing. In practice, after a patent is filed, additional research is required prior to receiving Food and Drug Administration (FDA) approval of a New Drug Application (NDA). This can leave substantially less than 20 years of exclusivity to market the drug. Once a patent has expired, generic versions of the compound are permitted to be sold.

In 1984, Congress passed the Hatch-Waxman Act to encourage generic drug competition. Among other things, the Act:

• Required brand drug manufacturers to list patents covering the drug in the NDA in the FDA's list of Approved Drug Products with Therapeutic Equivalence Evaluations (Orange Book). If additional patents are obtained on a drug, they can be added to the Orange Book.
• Allowed generic firms to file an abbreviated new drug application (ANDA) that relied on the safety and efficacy data from the branded product.

If a generic company applies for ANDA approval prior to expiration of the listed patents, it must file a Paragraph IV certification, whereby it states that the unexpired patents on the branded product are invalid, unenforceable, or will not be infringed by its product. On challenging the patents, the generic company receives 180 days of generic exclusivity, i.e., where no other generic product can be sold during this period. However, the company selling the brand then has an opportunity to sue for infringement, which triggers a 30-month stay on approval of the ANDA. These provisions in the Hatch-Waxman Act have resulted in challenges to certain alleged conduct involving their patents.

FTC Challenges to Orange Book Patent Listings

For many years, the FTC has opposed purported improper patent listings in the Orange Book. For example, since the early 2000s, it filed Amicus Curiae briefs in support of plaintiffs in litigation matters. More recently, however, the FTC issued a policy statement with its intention to scrutinize Orange Book listings to determine whether they constituted unfair methods of competition under Section 5 of the FTC Act. On November 7, 2023, it sent warning letters to 10 manufacturers challenging more than 100 of their patents listed in the Orange Book. Finally, on April 30, 2024, it sent additional warning letters to 10 companies disputing more than 300 Orange Book patent listings. To date, no additional enforcement actions have been taken, but observers will be watching the FTC's next steps. At a minimum, these warning letters may cause firms to reconsider the benefits and costs of listing additional patents in the Orange Book.

Reverse Payment Cases

In some cases, the holder of a patent listed in the Orange Book settled a Paragraph IV patent challenge from a generic firm by allegedly including a payment in exchange for an agreement to delay its entry with a generic product. The FTC (and private litigants) objected to these settlements, claiming that this type of settlement allows the patent holder to maintain a higher price and deprives consumers of a less expensive generic version of the product for a period of time. These cases have been referred to as “reverse payment” or “pay-for-delay” cases.

The FTC challenged patent settlements, arguing that reverse payments in pharmaceutical patent settlements should be per se illegal. Suits were also brought by private plaintiffs under the Sheman Act. Initially, some courts held that such settlements were presumptively illegal, while others held that they were presumptively legal. In 2013, the U.S. Supreme Court resolved the circuit split when it ruled that reverse payment settlements are neither presumptively legal or illegal, but should be evaluated on a case by case basis under the rule of reason. In FTC v. Actavis, Inc., the Supreme Court listed five considerations:

• whether there was a “large and unjustified” reverse payment;
• whether there were “legitimate justifications” for the payment;
• whether the size of the payment is “unexplained;”
• whether the patent holder had market power; and
• the settling parties’ reasons for agreeing to a settlement that included reverse payments.

Since that decision, several private litigation cases have been decided. These cases have helped shape the economic framework for analyzing reverse payment cases.

Two threshold issues coming out of this decision that have been addressed by courts are: (1) what consideration qualifies as a reverse payment, and (2) what is required to demonstrate antitrust injury.

Courts have ruled that reverse payments need not be in cash. Rather, reverse payments can take many forms, including an agreement by the brand company not to launch an authorized generic until after the 180-day exclusivity period. See King Drug Co v SmithKline Beecham Corp., They can also be, for example, agreements on other drugs, reduced prices for supply of products, or contemporaneous seemingly unrelated agreements. See, e.g., In re Niaspan Antitrust Litigation, King Drug Co of Florence Inc. v. Cephalon, Inc., and In re Loestrin 24 Fe Antitrust Litigation.

With respect to demonstrating antitrust injury, plaintiffs often allege that the generic firm would have entered the market at an earlier date than the date in the settlement agreement. This could be, for example, after winning the patent dispute, or an “at risk” launch, i.e., prior to resolution of the suit. In addition, plaintiffs argue that purchasers and payors would have paid lower prices by purchasing the generic product and/or a reduced price for the brand. In assessing whether plaintiffs were injured, courts have wrestled with several issues including the appropriate and inappropriate use of averages, the extent and identification of uninjured class members, numerosity, and causation. We discuss each of these issues below.

Use of Averages

Plaintiffs often use economic literature, average pricing data from sources such as IQVIA, and aggregated analyses from documents to analyze class-wide impact and damages. In some cases, the courts have accepted these averages and certified the proposed class. In other cases, defendants have pointed to individualized issues that averages cannot capture and courts have found these arguments to be persuasive and denied the class.

In a case involving the drug Lamictal, the brand company, GlaxoSmithKline (GSK) settled a patent dispute with Teva Pharmaceuticals. In the settlement, GSK agreed not to launch an authorized generic until 180 days after patent expiration and allowed Teva to launch a competing generic formulation (albeit, less prescribed) product three years before patent expiration. See In re Lamictal Direct Purchaser Antitrust Litigation.

Plaintiffs claimed that Teva would have launched its generic product three years earlier, that launch would have driven down the price of the GSK branded product, and GSK would have launched its own authorized generic. The pricing effects in plaintiffs’ analysis were based on average effects in the economic literature and general pricing forecasts for the generic product, and these purportedly showed class-wide injury. The court ruled that “[w]hile averages may be acceptable where they do not mask individualized injury we cannot determine whether that occurred here because of the lack of analysis.” It cited:

• product-specific factors that may have affected patients’ willingness to switch to a generic; and
• GSK's contention that launching an authorized generic was not an attractive strategy and, instead, engaging in strategic discounting.

These factors did not necessarily lend themselves to the use of averages. For example, strategically offering deep discounts to selected pharmacies in exchange for agreeing to only sell branded Lamictal means that an average price cannot be representative of the price paid by all pharmacies. In addition, Teva further lowered its price in response to this strategy, and defendants’ expert opined that 25 of the 33 generic-only purchasers likely paid the same or lower prices in the actual world compared to the but-for world.

The use of averages was also questioned in a case involving the drug Niaspan. Here, too, the plaintiffs used economic literature, aggregate forecasts, and average prices to attempt to show class-wide injury. The court viewed the use of averages as inappropriate when it hid “several groups of uninjured class members who cannot be easily identified.”

Nevertheless, averages have been accepted by courts in some cases. For example, in a case involving the drug Loestrin 24 Fe, the court in the case certified the class because incorporating average discounts in the but-for world was sufficiently reliable at that stage, leaving the ultimate determination to the jury. In a case involving the drug Zetia, the court certified the class because defendants did not show any persuasive evidence that applying average discounts in the but-for world was inappropriate.

Uninjured Class Members

Enumeration and identification of uninjured class members has also been an issue courts have wrestled with in their decisions. If injured class members cannot be distinguished from uninjured class members, then there may be an issue with ascertainability. In addition, in some cases courts have refused to certify a class if it contained “too many” uninjured class members—the term “too many” has differed across numerous cases.

In 2015, the First Circuit ruled in a case involving the drug Nexium that a “certified class may include a de minimis number of potentially uninjured parties” and that a claims administrator could use affidavits from putative class members to identify injured and uninjured parties. However, subsequent decisions have taken a different approach. For example, in a case involving the drug Asacol, the court ruled that this approach was not appropriate. Moreover, since the experts agreed that 10 percent of the proposed class was uninjured and plaintiffs’ proposal to identify them was deficient, the court stated that this is not the case where “very small absolute number of class members might be picked off in a manageable, individualized process” and “the need to identify those individuals will predominate and render an adjudication unmanageable.”

Not all courts have reached the same conclusion. For example, the court in a case involving the drug Solodyn offered the opposite conclusion, where it granted class certification even though the plaintiffs’ expert admitted that the class contained at least 10 percent uninjured class members.

Numerosity

Numerosity refers to whether the class is so large that joinder of all members is impracticable. The 2016 decision involving the drug Modafinil has been well-known for its assessment of the standards for plaintiffs in a proposed class action to meet the numerosity requirement for class certification. The court provided six factors for assessing numerosity:

• Judicial economy,
• Class members’ ability and motivation to litigate as joined plaintiffs,
• Financial resources of class members,
• Geographic dispersion of class members,
• Ability to identify future claimants, and
• Whether the claims are for injunctive relief or damages.

However, in a recent case involving the drug Colchicine, the court conducted a rigorous analysis of these factors and concluded that “[o]ur rigorous analysis of the evidence (especially the lack of evidence) confirms Value Drug has not shown…joinder would be impracticable” and the plaintiff “does not adduce evidence of why the joinder of no more than forty-nine known-entity purchasers of colchicine is impracticable.”

Causation

One of the elements of an economic analysis in reverse payment cases is the issue of causation. If the settlement cannot be shown to have resulted in a delay in the introduction of a generic product, then there is no causal link between the settlement and the alleged injury. For example, if the generic product has not received FDA approval before the agreed entry date in the settlement, it may be more difficult to show that a generic delay has occurred.

In a case involving the drug Asacol, plaintiffs argued that the generic product would have had an “at risk” launch absent the settlement. The district court dismissed the claim, noting that the generic had not received FDA approval and finding that plaintiffs could not allege whether the settlement or lack of FDA approval caused any alleged injury. However, in a case involving the drug Glumetza, the defendants argued that the brand manufacturer would not have launched “at risk,” but the court rule that this issue “will be decided for the class at summary judgement or trial.”

In the case discussed above involving Colchicine, the plaintiffs’ expert relied on two earlier entry scenarios that were provided by counsel, but the plaintiff did not show that these scenarios were plausible. Specifically, the court ruled, plaintiff “admittedly bases its arguments almost entirely on the expert opinions” of its economic expert to show overcharges to brand and generic purchasers. However, the “opinions . . . offered in [his] report with respect to impact and aggregate damages are predicated on these two but-for scenarios” and he “does not cite facts or data supporting this theory of impact or testing its plausibility.”

The first fully litigated reverse payment case since FTC v. Actavis, Inc.centered on the existence of any procompetitive effects of the settlement agreement and whether they outweigh anticompetitive effects. In Impax Laboratories, Inc. v. FTC,it was alleged that the brand manufacturer, Endo, and the generic manufacturer, Impax, entered into an agreement to delay generic entry in exchange for cash payments. Endo introduced a new version of the branded product during the delay period so the generic product was not a substitute for the new, reformulated branded product, but the new product was later recalled. In its appeal, Impax argued that any anticompetitive impact was reduced by this series of events. However, the Fifth Circuit rejected this argument and concluded that an assessment of anticompetitive effects should be done at the time the agreement occurred, not after.

Conclusion

As our discussion illustrates, there have been numerous FTC actions and private litigation matters over the past few decades. Over that period, the economic analysis of alleged anticompetitive patent practices has continuously evolved as courts wrestled with complex issues, particularly related to demonstrating antitrust impact. One overarching theme, however, is the trend towards increasingly rigorous analysis of the data and methods used to assess injury. We expect this trend to continue as plaintiffs, defendants, and judges become more well-versed and sophisticated in their arguments and analyses.