Xryem: Pharmaceutical Settlement Acceleration Clause Found Anticompetitive Due To Risk Of “Profit Crushing Competition”

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On August 13, 2021, in a decision that largely flew under antitrust and patent practitioners’ radars, U.S. District Judge Lucy H. Koh mostly denied a motion to dismiss in the alleged “reverse payment” case, In Re Xyrem (Sodium Oxybate) Antitrust Litig.1 In a notable twist, the Court ruled that acceleration clauses, which have the potential to permit generic entry before the allegedly delayed launch date, threatened “profit-crushing competition,” which the Court held to be an anticompetitive result. Acceleration clauses are common features in Hatch-Waxman patent settlements and the ramifications of this decision could have a significant impact for all pharmaceutical patent settlements.

I. Xyrem Background

The plaintiffs allege that Jazz Pharmaceuticals and Hikma Pharmaceuticals, among others, engaged in a conspiracy related to Jazz’s branded narcolepsy drug, Xyrem (sodium oxybate). The plaintiffs allege that Jazz entered into “reverse payment” settlements with the first-to-file generic company (Hikma) as well as with the later-filing generic drug-makers. Jazz allegedly assured Hikma that it would face no generic competition during its first 180 days on the market, an alleged $480 million value to Hikma.2 Specifically, the plaintiffs allege reverse payments via (a) Jazz’s agreement not to launch an authorized generic (“AG”) version of Xyrem through a third party during Hikma’s 180-day first-to-file exclusivity period; (b) Hikma’s royalty obligation to Jazz, which escalates as Hikma’s market share increases (disincentivizing a Jazz AG launch); and (c) an “acceleration clause” that would allow Hikma to sell AG product immediately if (1) a generic version of Xyrem enters the market without Jazz’s permission; or (2) Xyrem’s unexpired patent claims are rendered invalid or unenforceable.3

Judge Koh denied defendants’ motion to dismiss, finding that the plaintiffs sufficiently alleged that Jazz conveyed value to Hikma—i.e., the assurance that it would face no generic competition through its first 180 days—through the three reverse payments from Jazz to Hikma outlined above.4 While the Court’s findings as to the third-party AG provisions and the escalating royalties are not clear outliers, the characterization of standard acceleration clauses as potential “payments” represents a significant departure from the Supreme Court’s landmark decision in FTC v. Actavis, Inc.5

II. Acceleration Clauses, Generally

Hatch-Waxman settlements routinely incorporate acceleration clauses. Acceleration clauses ensure that the first-filer maintains its place in line, without which first-filers are far less likely to settle. Acceleration clauses thereby encourage settlement—a desirable outcome confirmed by Actavis. As for a later-filer, it may enter the market with some exclusivity—just those that chose to settle and itself—if it prevails in its patent litigation. But if the later-filer loses the litigation, it must wait for the patents to expire to launch and, when it does launch later, it will launch into a fully saturated market. Thus, the detriments of losing for later-filers significantly outweighs the expected benefit of winning, making settlement the best option. This is the design of the Hatch-Waxman Act, which both encourages and enables generic competition.

III. Actavis and Its Application in Xyrem

In Actavis, the Supreme Court held that reverse payment settlements may be subject to antitrust scrutiny. The Supreme Court noted that “the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market” which it found to be “unusual,” and could act as a proxy for a potential antitrust violation.6 Thus, a large payment flowing from the brand to generic may fall within Actavis’s ambit.

The Supreme Court made clear, however, that it did not intend to transform all routine patent settlements into antitrust violations. Indeed, the majority recognized “a general legal policy favoring the settlement of disputes,”7 finding “[w]here a reverse payment reflects traditional settlement considerations . . . there is not the same concern that a patentee is using its monopoly profits to avoid the risk of” invalidation or noninfringement.8 The Supreme Court explicitly noted that courts should not subject “settlements taking [] commonplace forms” to antitrust liability—e.g., where an infringement plaintiff settles for an amount less than its full demand or where the infringement plaintiff pays the infringement defendant to settle a counterclaim.9

In Xyrem, Judge Koh departed from Actavis’s treatment of routine patent settlement provisions with regard to acceleration clauses, finding that such clauses constitute a payment to Hikma in two ways. First, Judge Koh found acceleration clauses “plausibly disincentiviz[e] other generic manufacturers from litigating their patent claims and coming to market as soon as possible” because “if another generic manufacturer successfully enters the market, that manufacturer immediately faces competition[.]”10 Second, when entered with multiple settling generics, Judge Koh found the combination of acceleration clauses “plausibly operates as a cartel enforcement mechanism” by “creating a powerful threat . . . [of] competitive behavior[.]”11 Judge Koh reasoned that the settling generics formed a combined force such that any generic that enters prior to the agreed first-filer launch date “would immediately face profit-crushing competition,” a “punishment” that will, in Judge Koh’s view, prevent any other generic from seeking entry.12

Judge Koh relied on several reverse payment decisions to support her conclusion.13 None go as far as Xyrem. For example, the Loestrin decisions found that an acceleration clause could “be cognizable as a component of a complex settlement agreement amounting to a large and unjustified reverse payment.”14 Similarly, in Namenda, the court (relying on Loestrin) allowed acceleration-clause allegations to proceed to trial, but chose to do so because there was “no need to resolve [the close question] now” given that the balance of the case was proceeding to trial.15 As the Namenda court acknowledged, the brand company made a “rather appealing argument” that the “harm” the plaintiff “assigns to the acceleration clauses is actually just increased competition among generics” which “present[ed] a close question.”16

In Staley, the court considered two types of most-favored nations17 clauses: a “Most-Favored Entry” clause, which pushed up a generic entry, and a “Most-Favored Entry Plus” clause, which restricted the brand from granting a patent license to any later-filer until some period of time following the first-filer’s launch extending the first-filer’s exclusivity.18 The court took specific issue with the latter type, but found the former (a commonplace accelerator) was “not as clear a deterrent to a second filer . . . because a second filer is simply prevented from doing better than the first filer but is nevertheless guaranteed equality[.]”19 Finally, in Sensipar, the closest of the cited authorities, the court found an acceleration provision that allowed a generic company to resume sales of its generic product where another generic launched before the agreed-upon entry date could constitute a reverse payment.20 The court reasoned that the clause constituted an “additional transfer of value” that “must also be factored into the rule of reason analysis,” but did not find an acceleration clause to be sufficiently pernicious to support an antitrust claim on its own.21 Rather, the court held that where “multiple settlement terms are linked . . . . [and] the acceleration provision is related to (and indeed part of) the [] settlement, it must be considered as part of the required holistic analysis.”22

IV. Analysis

The Xyrem decision both contradicts the defining principle of antitrust law and misreads Actavis. First, it is axiomatic that competition is the end for which the antitrust laws exist.23 The profits that are “crushed” as a result of competition are purportedly monopolistic gains—the antithesis of antitrust law. Conduct that creates competition is, by definition, pro-competitive.

Second, an acceleration clause does not provide anything to the generic challenger that it would not have received by prevailing in the litigation. In fact, accelerated entry is precisely the type of remedy generics seek in litigating a Hatch-Waxman infringement action, and is thus akin to the “commonplace forms” of settlement that Actavis left in place.24 In other words, later-filing generic manufacturers would face such “disincentivizing” competition if the first filer had won the litigation, too. Later filers understand and expect to face competition, and are nonetheless motivated to file ANDAs to get to market.

Even the court in Sensipar recognized the novelty of its order, stating that “there may well be an issue [] that should be taken up to the Third Circuit before the end of the case and [] before any additional expense is incurred on discovery.”25 The Sensipar court further rejected an independent claim that the acceleration clause acted as a market allocation that kept other ANDA filers off the market, finding that the “Plaintiffs have not plausibly alleged that other manufacturers . . . would be deterred from launching their generic product just because Amgen agreed to allow Teva also to re-launch upon any third-party launch.”26 Rather, the economic reality is that “ANDA filers understand that other manufacturers of generic drugs may also file ANDAs . . . which [] compete not only with the branded drug but also with any ANDA filer’s generic product[.]”27

Xyrem reached the opposite conclusion in finding clauses that accelerated generic competition and, consequently, lower prices for consumers, to be anticompetitive. As the court in Actos found, “[t]he practical effect of the acceleration clauses [is] to increase competition in the event that other generics entered the market earlier than contemplated by the agreement. . . . the triggering of the acceleration clause in any of the Generic Defendants’ settlement agreements [] would result in four or more generics entering the market, instead of three—an indisputably procompetitive effect.”28

Judge Koh, a highly respected member of the federal judiciary, has recently been nominated for a second time to the Ninth Circuit Court of Appeals.29 On that basis alone, Xyrem is a significant district court decision. It is not practical to settle patent litigation, especially with first-filers, without acceleration clauses. By allowing these familiar settlement forms to instead be reclassified as reverse payments, Xyrem risks condemning a broad swath of Hatch-Waxman patent settlements, “discourage[ing] any rational party from settling a patent case because it would be an invitation to antitrust litigation.”30

1 No. 20-MD-02966-LHK, 2021 U.S. Dist. LEXIS 153343 (N.D. Cal. Aug. 13, 2021).
2 Id. at *28-32.
3 Id. at *30-31. A clause permitting accelerated entry if/when another party successfully “invalidate[s] or render[s] unenforceable the unexpired patent claims[,]” reflects loss of the intellectual property basis for the license agreement and its effective date. Without valid and enforceable intellectual property, there is no basis under patent law for any delayed launch in a generic product.
4 Id. at *81-82.
5 570 U.S. 136 (2013).
6 Id. at 147, 158.
7 Id. at 154.
8 Id.. at 154-56.
9 Id. at 151-52.
10 Xyrem, 2021 U.S. Dist. LEXIS 153343, at *73.
11 Id. at *74-75 (internal citation and quotations omitted); see also id. at *97 (relying on acceleration clauses as a “cartel enforcement mechanism” to support the plausibility of the plaintiffs’ market allocation allegation).
12 Id. at *75, 97 (internal citation and quotations omitted).
13 Id. at *77.
14 In re Loestrin 24 Fe Antitrust Litig., 261 F. Supp. 3d 307, 334 (D.R.I. 2017). The Court eventually ruled that a jury should decide if the acceleration clause constituted a reverse payment. 433 F. Supp. 3d 274, 320-21 (D.R.I. 2019).
15 In re Namenda Indirect Purchaser Antitrust Litig., No. 1:15-cv-6549 (CM) (RWL), 2021 U.S. Dist. LEXIS 110081, at *85-86 (S.D.N.Y. June 11, 2021) (citing Loestrin, 433 F. Supp. 3d at 321).
16 Id.
17 A most-favored nations clause is a type of acceleration clause which provides for a settling party to get the benefit of any earlier launch date that the brand agrees to with a later-settling generic company, such that the earlier-settling generic can either launch when agreed to or sooner.
18 Staley v. Gilead Scis., Inc., 446 F. Supp. 3d 578, 589, 610 (N.D. Cal. 2020).
19 Id. at 612 (emphasis in original).
20 In re Sensipar Cinacalcet Hydrochloride Tablets Antitrust Litig., No. 1:19-md-01895-LPS, 2020 U.S. Dist. LEXIS 223786, at *19-21 (D. Del. Nov. 30, 2020).
21 Id. at *20-21.
22 Id. at *20.
23 Brooke Grp. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) (“It is axiomatic that the antitrust laws were passed for the protection of competition, not competitors.”) (internal citation and quotations omitted) (emphasis in original).
24 Actavis, 570 U.S. at 152.
25 In re Sensipar Cinacalcet Hydrochloride Tablets Antitrust Litig., No. 1:19-md-01895-LPS, ECF No. 184, at 15 (D. Del. Dec. 30, 2020).
26 Sensipar, 2020 U.S. Dist. LEXIS 223786, at *25-26.
27 Id. at *26 (citing Belcher Pharm., LLC v. Int’l Medication Sys., Ltd., 379 F. Supp. 3d 326, 331 n.4 (D. Del. 2019)).
28 In re Actos End Payor Antitrust Litig., No. 13-CV-9244-RA, 2015 U.S. Dist. LEXIS 127748, at *47 (S.D.N.Y. Sept. 22, 2015), aff’d in part, vacated in part, 848 F.3d 89 (2d Cir. 2017).
29 Nate Raymond, U.S. Senate panel advances 9th Circuit nominee Koh, REUTERS, available at https://www.reuters.com/legal/government/us-senate-panel-advances-9th-circuit-nominee-koh-2021-10-28/. (Oct. 28, 2021).
30 In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F. Supp. 2d 188, 252 (E.D.N.Y. 2003).

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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