King Drug Co. of Florence v. Smithkline Beecham Corp.

• Decision Date: 26 June 2015
• Docket Number: No. 14–1243.,14–1243.
• Citation: 791 F.3d 388
• Parties: KING DRUG COMPANY OF FLORENCE, INC.; Louisiana Wholesale Drug Co., Inc., on behalf of itself and all others similarly situated, Appellants v. SMITHKLINE BEECHAM CORPORATION, doing business as Glaxosmithkline; Teva Pharmaceutical Industries Ltd.; Teva Pharmaceuticals.
• Court: U.S. Court of Appeals — Third Circuit

791 F.3d 388

KING DRUG COMPANY OF FLORENCE, INC.; Louisiana Wholesale Drug Co., Inc., on behalf of itself and all others similarly situated, Appellants

v.SMITHKLINE BEECHAM CORPORATION, doing business as Glaxosmithkline; Teva Pharmaceutical Industries Ltd.; Teva Pharmaceuticals.

No. 14–1243.

United States Court of Appeals, Third Circuit.

Argued: Nov. 19, 2014.

Opinion Filed: June 26, 2015.

Bruce E. Gerstein, Esq. [Argued], Kimberly Hennings, Esq., Joseph Opper, Esq., Garwin Gerstein & Fisher, New York, N.Y., Peter S. Pearlman, Esq., Cohn, Lifland, Pearlman, Herrmann & Knopf, Saddle Brook, NJ, for Appellants.

Donald L. Bell, II, Esq., National Association of Chain Drug Stores, Alexandria, VA, Barry L. Refsin, Esq., Hangley, Aronchick, Segal, Pudlin & Schiller, Philadelphia, PA, for Amicus Curiae National Association of Chain Drug Stores Inc.

Steve D. Shadowen, Esq., Hilliard & Shadowen, Mechanicsburg, PA, for Amicus Curiae 53 Law, Economics, and Business Professors, The American Antitrust Institute and Consumers Union.

Peter Kohn, Esq., Richard D. Schwartz, Esq., Faruqi & Faruqi Jenkintown, PA, David F. Sorensen, Esq., Berger & Montague Philadelphia, PA, for Amicus Curiae Professional Drug Company, Inc.

Mark S. Hegedus, Esq. [Argued], Federal Trade Commission, Washington, DC, for Amicus Curiae Federal Trade Commission.

Crystal M. Utley, Esq., Office of Attorney General of Mississippi, Jackson, MS, for Amicus Curiae State of Mississippi, State of Alaska, State of Arkansas, State of Arizona, State of California, State of Connecticut, State of Delaware, State of Hawaii, State of Idaho, State of Illinois, State of Indiana, State of Kentucky, State of Massachusetts, State of Maryland, State of Michigan, State of Minnesota, State of New Hampshire, State of New Mexico, State of New York, State of Nevada, State of Ohio, Commonwealth of Pennsylvania, State of Rhode Island, State of Tennessee, State of Texas, State of Utah, State of Vermont, State of Washington.

Douglas S. Eakeley, Esq., Joseph A. Fischetti, Esq., Lowenstein Sandler Roseland, NJ, Barbara W. Mather, Esq. [Argued], Robin P. Sumner, Esq., Pepper Hamilton, Philadelphia, PA, for Appellee Smithkline Beecham Corporation.

Jonathan D. Janow, Esq., John C. O'Quinn, Esq., Karen N. Walker, Esq., Kirkland & Ellis, Washington, DC, Jay P. Lefkowitz, Esq. [Argued], Kirkland & Ellis, New York, N.Y., for Appellees TEVA Pharmaceutical Industries LTD and TEVA Pharmaceuticals.

Ryan Z. Watts, Esq., Arnold & Porter, Washington, DC, for Amicus Curiae Pharmaceutical Research and Manufacturers of America.

Daniel S. Francis, Esq., Ryan A. Shores, Esq., Hunton & Williams, Washington, DC, for Amicus Curiae National Association of Manufacturers.

Leslie E. John, Esq., Ballard Spahr, Philadelphia, PA, for Amicus Curiae Professor W. David Bradford, University of Georgia, Professor Ian Cockburn, Boston University, Pierre Yves Cremieux, Analysis Group, Inc., Professor Henry G. Grabowski, Duke University, Paul E. Greenberg, Analysis Group, Inc., Professor James W. Hughes, Bates College, George Kosicki, Analysis Group, Inc., Professor Tracy R. Lewis, Duke University, Professor Sean Nicholson, Cornell University, Bruce E. Stangle, Analysis Group, Inc., Sally D. Woodhouse, Cornerstone Research, Professor Michael K. Whoglgenant, North Caroline State University.

Brian T. Burgess, Esq., William M. Jay, Esq., Goodwin Procter, Washington, DC, Christopher T. Holding, Esq., Goodwin Procter, Boston, MA, for Amicus Curiae Generic Pharmaceutical Association.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In this appeal from the grant of a motion to dismiss for failure to state a rule-of- reason claim under Sections 1 and 2 of the Sherman Act under Federal Rule of Civil Procedure 12(b)(6), we are asked to determine whether FTC v. Actavis, ––– U.S. ––––, 133 S.Ct. 2223, 186 L.Ed.2d 343 (2013), covers, in addition to reverse cash payments, a settlement in which the patentee drug manufacturer agrees to relinquish its right to produce an “authorized generic” of the drug (“no-AG agreement”) to compete with a first-filing generic's drug during the generic's statutorily guaranteed 180 days of market exclusivity under the Hatch–Waxman Act¹ as against the rest of the world.

In Actavis, the Supreme Court held that unexplained large payments from the holder of a patent on a drug to an alleged infringer to settle litigation of the validity or infringement of the patent (“reverse payment”) “can sometimes violate the antitrust laws.” Id. at 2227. The Court rejected the near-irrebuttable presumption, known as the “scope of the patent” test, that a patentee can make such reverse payments so long as it is paying potential competitors not to challenge its patent within the patent's lifetime.

Plaintiffs here, direct purchasers of the brand-name drug Lamictal

, sued Lamictal's producer, Smithkline Beecham Corporation, d/b/a GlaxoSmithKline (“GSK”), and Teva Pharmaceutical Industries Ltd. (“Teva”² ), a manufacturer of generic Lamictal, for violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 & 2.³ In earlier litigation, Teva had challenged the validity and enforceability of GSK's patents on lamotrigine, Lamictal's active ingredient. Teva was also first to file an application with the FDA alleging patent invalidity or nonenforceability and seeking approval to produce generic lamotrigine tablets and chewable tablets for markets alleged to be annually worth $2 billion and $50 million, respectively. If the patent suit resulted in a judicial determination of invalidity or nonenforceability—or a settlement incorporating such terms—Teva would be statutorily entitled to a valuable 180–day period of market exclusivity, during which time only it and GSK could produce generic lamotrigine tablets. (The relevant statute permits the brand to produce an “authorized generic” during the exclusivity period. Mylan Pharm., Inc. v. FDA, 454 F.3d 270, 276–77 (4th Cir.2006) ; Teva Pharm. Indus. Ltd. v. Crawford, 410 F.3d 51, 55 (D.C.Cir.2005) ; see also Sanofi–Aventis v. Apotex Inc., 659 F.3d 1171, 1175 (Fed.Cir.2011).)

After the judge presiding over the patent litigation ruled the patent's main claim invalid, GSK and Teva settled. They agreed Teva would end its challenge to GSK's patent in exchange for early entry into the $50 million annual lamotrigine chewables market and GSK's commitment not to produce its own, “authorized generic” version of Lamictal

tablets for the market alleged to be worth $2 billion annually. Plaintiffs contend that this “no-AG agreement” qualifies as a “reverse payment” under Actavis because, like the cash reverse payments the Court there warned could face antitrust scrutiny, GSK's no-AG commitment was designed to induce Teva to abandon the patent fight and thereby agree to eliminate the risk of competition in the $2 billion lamotrigine tablet market for longer than the patent's strength would otherwise permit.

We believe this no-AG agreement falls under Actavis 's rule because it may represent an unusual, unexplained reverse transfer of considerable value from the patentee to the alleged infringer and may therefore give rise to the inference that it is a payment to eliminate the risk of competition. As the Court noted, these kinds of settlements are subject to the rule of reason.

I.

“A patent ... is an exception to the general rule against monopolies and to the right to access to a free and open market.” Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965) (quoting Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 816, 65 S.Ct. 993, 89 L.Ed. 1381 (1945) ). The Constitution's “Patent Clause itself reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the ‘Progress of Science and useful Arts.’ ” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 146, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) (quoting U.S. Const. art. I, § 8, cl. 8 ). In turn, “[f]rom their inception, the federal patent laws have embodied a careful balance between the need to promote innovation and the recognition that imitation and refinement through imitation are both necessary to invention itself and the very lifeblood of a competitive economy.” Id.; see X Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1780a (3d ed.2011) (“Patent law ... serves the interests of consumers by protecting invention against prompt imitation in order to encourage more innovation than would otherwise occur.”). A patent, consequently, “is a special privilege designed to serve the public purpose of promoting the ‘Progress of Science and useful Arts.’ ” Precision Instrument Mfg. Co., 324 U.S. at 816, 65 S.Ct. 993.

With the Drug Price Competition and Patent Term Restoration Act of 1984, Pub.L. No. 98–417, 98 Stat. 1585, commonly known as the Hatch–Waxman Act, Congress attempted to balance the goal of “mak[ing] available more low cost generic drugs,” H.R.Rep. No. 98–857, pt. 1, at 14–15 (1984), reprinted in 1984 U.S.C.C.A.N. 2647, 2647–48, with the value of patent monopolies in incentivizing beneficial pharmaceutical advancement, see H.R.Rep. No. 98–857, pt. 2, at 30 (1984), reprinted in 1984 U.S.C.C.A.N. 2686, 2714. The Act seeks to accomplish this purpose, in part, by encouraging “manufacturers of generic drugs ... to challenge weak or invalid patents on brand name drugs so consumers can enjoy lower drug prices.” S.Rep. No. 107–167, at 4 (2002). The resulting regulatory framework has the following four relevant features identified by the Supreme Court in Actavis, 133 S.Ct. at 2227–29.

First, a new drug—that is, a pioneer, “brand-name” drug—cannot be introduced until it is approved by the Food and Drug Administration (“FDA”). 21 U.S.C. § 355(a). A New Drug Application (“NDA”) requires the applicant to submit, among other things, “full reports of investigations which have been made to show whether or...