Federal Court Finds Actavis Applies Only To Settlements Involving Monetary Payments

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A United States district court judge sitting in the District of New Jersey has held that only patent litigation settlements involving monetary payments from branded to generic pharmaceutical manufacturers are subject to the rule of reason under the Supreme Court’s landmark decision issued earlier this year, FTC v. Actavis. In a recent decision issued in In re Lamictal Direct Purchaser Antitrust Litigation, Judge William H. Walls is the first district court judge to limit the Supreme Court’s holding to settlements involving money. In so doing, he parts company with other district courts that have considered the issue in the wake of Actavis.

In Lamictal plaintiffs have challenged a patent litigation settlement between GlaxoSmithKline (GSK) and Teva. Plaintiffs allege that under the settlement agreement, GSK granted Teva exclusive licenses to market generic lamotrigine tablets and chewables prior to patent expiration, during which time GSK agreed not to market its own authorized generic. In December 2012, Judge Walls dismissed plaintiffs’ complaint with prejudice, finding that under the then-prevailing “quick look” test in the Third Circuit, the alleged agreement did not trigger antitrust scrutiny because the alleged agreement contained no “payment.” Plaintiffs appealed, and in July 2013, the Third Circuit remanded for reconsideration in light of the Supreme Court’s ruling in Actavis.

In Actavis, the Supreme Court rejected the Third Circuit’s “quick look” test, as well as the “scope of the patent” test embraced by other circuits. Instead, the Supreme Court held that because “large, unjustified reverse payments” made to settle patent litigation pose the risk of “significant anticompetitive effects,” large reverse payments should be analyzed under the traditional rule of reason analysis. In last week’s decision, Judge Walls, observing that the Actavis majority and dissenting opinions “reek with the discussion of payment of money,” agreed with GSK and Teva that Actavis subjects only monetary payments that are large and unjustified to antitrust scrutiny. Judge Walls held that “nothing in Actavis says that a settlement contains a reverse payment when it confers substantial financial benefits,” and reaffirmed his earlier reasoning that an exchange of “consideration” cannot in itself be sufficient to trigger antitrust scrutiny because “consideration is an essential element of any enforceable contract.” Further, Judge Walls acknowledged that two other federal judges have interpreted Actavis to potentially reach settlements that do not include monetary payments, but he expressly dismissed those decisions as “unpersuasive.”

Judge Walls found that Actavis prescribes a three-part test, under which a court must determine first whether there is a monetary reverse payment, and second whether the payment is large and unjustified. Only if these two prongs are met should a district court turn to the third part of the test: the rule of reason analysis. Under the rule of reason, Actavis requires district courts to consider (1) whether the payment has the potential for genuine adverse effects on competition, (2) whether the payment is justified, (3) whether the branded manufacturer has market power, (4) whether the size of the settlement suggests it is intended to maintain supracompetitive prices and that it can serve as a “workable surrogate for a patent’s weakness,” and (5) whether the parties could have settled in some other way. Applying these considerations, Judge Walls further found that even if antitrust review of plaintiffs’ allegations were warranted, plaintiffs failed to plead a rule of reason case. Plaintiffs have appealed the decision to the Third Circuit.

GSK is represented in this matter by Barbara W. Mather, Robin P. Sumner, Evan W. Davis and Melissa J. Hatch of Pepper Hamilton LLP.