1st Circuit Joins 3rd Circuit: Non-Cash Reverse Payments Subject to Antitrust Scrutiny

by Patterson Belknap Webb & Tyler LLP

Courts continue to evaluate the degree to which “reverse payments” are permitted post-Actavis.  In the latest of these decisions, issued on February 22, 2016, the First Circuit held that non-cash payments may run afoul of the antitrust laws.  See In re: Loestrin Fe Antitrust Litigation, Nos. 14-2071, 15-1250 (1st Cir. Feb. 22, 2016).

In Actavis, the Supreme Court held that unexplained large payments from a patent-holder to an alleged infringer to settle litigation of the validity or infringement of the patent (“reverse payments”) can sometimes violate the antitrust laws.  Since then, courts have been tasked with evaluating when such payments prove to be antitrust violations.  In Loestrin, the First Circuit joined the Third Circuit in finding that non-cash reverse payments are subject to antitrust scrutiny.  See King Drug Company of Florence, Inc. v. Smithkline Beecham Corp. d/b/a GlaxoSmithKline, No. 14-1243 (3d Cir. June 26, 2015) (“We do not believe Actavis’s holding can be limited to reverse payments of cash.”).

The Facts

The dispute in Loestrin arose from two settlement agreements resolving litigation concerning the patent that covers the oral contraceptive Loestrin 24 Fe (“Loestrin 24”).  The first litigation arose when Watson Pharmaceuticals, Inc. informed Warner Chilcott that it would introduce a generic version of Loestrin 24, following which Warner sued Watson for patent infringement.  The parties eventually reached a settlement, in which they agreed that Watson would delay entry of its generic version and, in exchange, Watson entered into promotional deals with Warner and received promises that Warner would not introduce its own generic version of Loestrin 24.  The second litigation arose when Lupin Pharmaceuticals, Inc. similarly announced it would introduce a generic version of Loestrin 24.  Again, Warner brought a patent infringement suit against Lupin.  And, again, the parties reached a settlement agreement in which Lupin agreed to wait to introduce its generic Loestrin 24 in exchange for, among other things, Warner’s agreement to enter into favorable side deals with Lupin.

Two putative classes of plaintiffs brought antitrust claims alleging that the settlement agreements are illegal under Actavis.  The District Court held that Actavis only applies to reverse payments that are in pure cash form, and dismissed the plaintiffs’ claims.  (We wrote about that decision here.)

The First Circuit’s Decision

The First Circuit determined “that the district court erred in determining that non-monetary reverse payments do not fall under Actavis’s scope.”  More specifically, it held that “antitrust scrutiny attaches not only to pure cash reverse payments, but to other forms of reverse payment that induce the generic to abandon a patent challenge, which unreasonably eliminates competition at the expense of consumers.”

The First Circuit explained that Actavis itself did not involve only cash payments:  rather, in Actavis, there were allegations that the reverse payments included a side deal in which the generic manufacturers agreed to promote the brand name drug in exchange for significant payments.  In the First Circuit’s view, “[t]his fact alone 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 qualify as a reverse payment subject to antitrust scrutiny.”  The First Circuit elaborated that although Actavis “does contain references to money,” the “key word used throughout the opinion is ‘payment,’ which connotes a much broader category of consideration than cash alone.”  Moreover, the First Circuit noted that a narrow construction of Actavis would “give drug manufacturers carte blanche to negotiate anticompetitive settlements so long as they involve non-cash reverse payments.”

Nonetheless, the First Circuit emphasized that “the value of a reverse payment is a key component in determining whether it is unlawful.”  It explained that “[a]lthough the value of non-cash reverse payments may be much more difficult to compute than that of their cash counterparts,” antitrust litigation frequently requires difficult and complex inquiries.

What’s Next?

The only two circuit courts to address this question have now held that Actavis applies to non-cash reverse payments; the majority of district courts have reached the same conclusion.  In the wake of the First Circuit’s decision, it seems likely that most courts will follow the First and Third Circuits in evaluating non-cash reverse payments under the rule of reason.

Still, plaintiffs who wish to allege that non-cash reverse payments violate the antitrust laws may face challenges in crafting their complaint:  the First Circuit warned that such plaintiffs must “plead information sufficient to estimate the value of the [payment], at least to the extent of determining whether it is large and unjustified.”  (internal quotation marks omitted).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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