[co-author: Jake Walter-Warner]

On September 22, Judge Ronnie Abrams of the Southern District of New York dismissed an antitrust lawsuit against Takeda Pharmaceuticals and three generic drug manufacturers based on settlements they had reached regarding a patent dispute over the drug ACTOS.  The court held that the settlements were not illicit “reverse payments” warranting scrutiny under the Sherman Act because there was no plausible basis for holding that the settlements reduced competition for the drug.  In the settlements, the generics did not receive any cash payments and primarily gained early entry licenses with acceleration clauses.

The plaintiffs in this lawsuit, In re Actos End Payor Antitrust Litigation, alleged that the agreements reached between Takeda and three generic manufacturers ran afoul of the Sherman Act pursuant to the Supreme Court’s 2013 FTC v. Actavis, Inc. decision.  In Actavis, the Court held that some patent settlements which involve payments from brand manufacturers to generic manufacturers—so called “reverse payments”—should be subject to antitrust scrutiny because such a settlement could cause anticompetitive harm by excluding products that do not actually infringe any patents.  The Court clarified that it will not usually be necessary to litigate the validity of a patent in order to answer the antitrust question because an “unexplained large reverse payment” suggests that the brand manufacturer has serious doubts about the viability of the patent and is using the reverse payment to maintain supracompetitive prices.  The Supreme Court noted that a compromise which allows the patent challenger to enter the market before the patent expires presumptively benefits consumers by introducing competition into the market.

In this case, Takeda reached individual agreements with three generic manufacturers to settle independent patent disputes related to the drug ACTOS.  Each of the settlements allowed the respective generic manufacturer to enter the market with a generic ACTOS product on August 12, 2012, almost four years before the expiration of the disputed patents.  Each agreement also contained an “acceleration clause” that enabled the generic to enter the market as soon as another generic manufacturer entered the market.

As a preliminary matter, the district court ruled that agreements like these, which do not contain cash payments, still fall within the purview of Actavis.  However, a court must be able to appraise the value of the terms in order to analyze whether the noncash payment is “large” and “unjustified.”  The court noted that on their faces, these settlements appeared to fall into the Actavis safe harbor protecting agreements that allow generics to enter the market prior to patent expiration.  The plaintiffs argued that it was the acceleration clauses which were anticompetitive because other generic manufacturers were discouraged from entering the market knowing that three other manufacturers were waiting in the wings.  The court rejected this argument, noting that if no other generic entered the market before August 12, the effect of the clauses would be neutral, and if another generic manufacturer did enter before August 12, the effect would be “indisputably procompetitive” because the clauses would trigger more generics to enter the market.  Judge Abrams noted that even if she were to credit plaintiffs’ speculation on how generics would have acted in the absence of the acceleration clauses, “[t]he mere possibility that the absence of an acceleration clause may result in more diverse generic competition is insufficient for Plaintiffs to plausibly state a reverse payment claim here.  Actavis requires only that a brand manufacturer not unlawfully restrict competition; it does not demand that the brand maximize competition.”

The court also found that the plaintiffs did not sufficiently allege that the “payments” embodied by the acceleration clauses were adequately “large” and “unjustified.”  The plaintiffs did not offer a method for calculating the value of the payments or a factual basis for their claim that the agreements were worth “hundreds of millions” dollars.  Without a basis to figure out what the settlements were worth, the court could not analyze if the payments were “unjustified” by comparing their value with the value of “traditional settlement considerations, such as avoided litigation costs or fair value for services.”  Moreover, the court noted that the plaintiffs did not “allege[] that any particular generic manufacturers were deterred from earlier entry, or allege[] any specific effect on price,” and therefore provided no “factual basis for the Court to evaluate the settlements’ unlawful anticompetitive effect.”

In dismissing the plaintiffs’ case, Judge Abrams held that they did not meet their initial burden under the rule of reason analysis of alleging cognizable anticompetitive conduct.  The court did acknowledge that acceleration clauses could be anticompetitive if they deprive a generic of their 180-day window of exclusivity under the Hatch-Waxman Act, but such a deterrent effect was not possible in this case because the only generics who could have been entitled to this benefit were the generics who “first filed” against the ACTOS patents—and those generics were the ones who subsequently entered the settlements at issue in the case.  The court concluded the opinion with a note of caution to future plaintiffs: “One thing should be clear…not all settlements are illegal, nor—in the Court’s view—should they be.”  This case shows that courts are skeptical that agreements which enable early entry are anticompetitive, and if plaintiffs hope to win on such a theory, they need to come armed with facts and figures showing how the settlements caused the unreasonable maintenance of monopoly pricing.