We’ve previously covered the New York State Attorney General’s (“NYS AG”) lawsuit against Actavis PLC and Forest Laboratories seeking to prevent them from discontinuing sales of the Forest drug Namenda IR, which is used to treat Alzheimer’s disease. New York has alleged that Actavis and Forest are engaging in “product hopping”—attempting to force prescribers and patients to switch to a new extended-release version of Namenda (Namenda XR) before a generic version can be launched. In December 2014, Judge Sweet of the District Court for the Southern District of New York granted the NYS AG’s request for a preliminary injunction and ordered the Defendants to keep Namenda IR on the market until after the entry of generic competitors.  (We discussed this injunction here and here). The Defendants pursued an immediate appeal, and on May 22 the Second Circuit affirmed the District Court. (The full opinion was not released until late last week). In doing so, the Second Circuit is the first federal appellate court to provide guidance regarding product hopping claims.

As we have previously discussed, lower courts have generally distinguished between “hard” switches, where the manufacturer discontinues sales of the old branded drug after the new drug is launched, and “soft” switches, where the manufacturer continues to sell the old drug while promoting the new drug, treating the former with far more skepticism. The Second Circuit explicitly adopted this terminology, finding that Defendants’ hard switch from Namenda IR to Namenda XR likely violated section 2 of the Sherman Act, while implying that soft switches were far more likely to withstand scrutiny under the antitrust laws.

Specifically, relying on the D.C. Circuit’s decision in United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), and its own prior decision in Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), the Second Circuit found that a critical inquiry for section 2 liability in cases where a monopolist launches a product redesign is whether the product redesign “coerces consumers and impedes competition” by forcing consumers to purchase the new product. (The parties had not disputed that Defendants currently possess a monopoly in the market for Namenda). Acknowledging that “neither product withdrawal nor product improvement alone is anticompetitive,” the Second Circuit nonetheless found that “the combination of introducing Namenda XR into the market and effectively withdrawing Namenda IR” both forced patients taking Namenda to make the switch and impeded competition by frustrating state generic substitution laws. The court rejected Defendants’ justifications for the switch as pretextual, finding that the evidence in the record reflected a clear intent to prevent generic competition.

The Second Circuit also rejected Defendants’ arguments that their patents associated with Namenda IR and Namenda XR could serve as a shield to antitrust liability, relying on the Supreme Court’s decision in FTC v. Actavis, Inc. and finding that Defendants had “tried to use their patent rights on Namenda XR to extend the exclusivity period for all of their memantine-therapy drugs.” The court also rejected the argument that the NYS AG had failed to show irreparable harm, conceding that the harm to patients and third-party payors would be economic in nature but that compensating hundreds of thousands of patients and “an unknown number” of payors would present a daunting logistical challenge. Given its rulings on the section 2 claims, the Second Circuit declined to reach the NYS AG’s section 1 claims, including its allegations regarding Forest’s arrangement with a pharmacy called Foundation Care related to the distribution of Namenda.

In preserving the hard switch/soft switch distinction initially developed by the lower courts (many of which are cited in its decision), the Second Circuit has now provided appellate confirmation of lower courts’ current approach to product hopping claims. Whether this test will continue to hold or be further refined will need to await further litigation (or a possible further appeal of this decision).