Valley Drug Co. v. Geneva Pharmaceuticals, Inc.

• Court: U.S. Court of Appeals — Eleventh Circuit
• Writing for the Court: Tjoflat
• Citation: Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 350 F.3d 1181 (11th Cir. 2003)
• Decision Date: 14 November 2003
• Docket Number: No. 02-10171.,02-10171.
• Parties: VALLEY DRUG COMPANY, Louisiana Wholesale Drug Co., Inc., Plaintiffs-Appellees, Sherman Act Class Plaintiffs, Consolidated-Plaintiff-Appellee, Walgreen Co., Inc., Drug Mart Pharmacy Corp., et al., Plaintiffs, Hy-Vee, Inc., from 99cv1938, Stop & Shop Supermarket Co., from 99cv1938 et al., Consolidated—Plaintiffs, v. GENEVA PHARMACEUTICALS, INC., Defendant, Zenith Goldline Pharmaceuticals, Inc., Defendant, Abbott Laboratories, Defendant-Consolidated — Defendant-Appellant, Novartis Pharmaceuticals Corporation, Ivax Pharmaceuticals, Inc., f.k.a. Zenith Goldline Pharmaceuticals, Inc., Consolidated-Defendants.

350 F.3d 1181

VALLEY DRUG COMPANY, Louisiana Wholesale Drug Co., Inc., Plaintiffs-Appellees Sherman Act Class Plaintiffs, Consolidated-Plaintiff-Appellee Walgreen Co., Inc., Drug Mart Pharmacy Corp., et al., Plaintiffs Hy-Vee, Inc., from 99cv1938, Stop & Shop Supermarket Co., from 99cv1938 et al., Consolidated—Plaintiffs, v. GENEVA PHARMACEUTICALS, INC., Defendant Zenith Goldline Pharmaceuticals, Inc., Defendant, Abbott Laboratories, Defendant-Consolidated — Defendant-Appellant, Novartis Pharmaceuticals Corporation, Ivax Pharmaceuticals, Inc., f.k.a. Zenith Goldline Pharmaceuticals, Inc., Consolidated-Defendants.

No. 02-10171.

United States Court of Appeals, Eleventh Circuit.

Decided November 14, 2003.

COPYRIGHT MATERIAL OMITTED

Jon W. Zeder, Ferrell, Schultz, Carter, Zumpano & Fertel, P.A., Miami, FL, Jeffrey I. Weinberger, Stuart N. Senator, Munger, Tolles & Olson, LLP, Los Angeles, CA, Wayne A. Cross, Dewey Ballantine LLP, New York City, for Abbott Laboratories.

Mitchell W. Berger, Berger & Singerman P.A., Fort Lauderdale, FL, David F. Sorensen, Daniel Berger, Berger & Montague, P.C., Philadelphia, PA, Richard B. Drubel, Boies, Schiller & Flexner L.L.P., Hanover, NH, Barry S. Taus, Garwin, Bronzaft, Gerstein & Fisher L.L.P., New York City, for Valley Drug Co., Louisiana Wholesale Drug Co., Inc. and Sherman Act Class Plaintiffs.

Scott E. Perwin, Kenny, Nachwalter, Seymour, Arnold, Critchlow & Spector P.A., Miami, FL, for Albertson's Inc., Eckerd Corp., Hy-Vee, Inc., The Kroger Co., The Stop & Shop Supermarket Co. and Walgreen Co., Amici Curiae.

Steve D. Shadowen, Schnader, Harrison, Segal & Lewis LLP, Harrisburg, PA, for CVS Meridian, Inc. and Rite Aid Corp., Amici Curiae.

Appeal from the United States District Court for the Southern District of Florida.

Before TJOFLAT, and ANDERSON, Circuit Judges, and STAFFORD^*, District Judge.

TJOFLAT, Circuit Judge:

This case, which involves intersecting questions of antitrust law and class action procedure, comes to us on appeal from the United States District Court for the Southern District of Florida. Louisiana Wholesale Drug Co. ("Louisiana Wholesale") and Valley Drug Co. ("Valley Drug") allege that the defendant Abbott Laboratories ("Abbott"), violated section 4 of the Clayton Act, 15 U.S.C. § 15¹, and section one of the Sherman Antitrust Act, 15 U.S.C. § 1², when it entered into settlement agreements with defendants Geneva Pharmaceuticals, Inc., ("Geneva") and Zenith Goldline Pharmaceuticals, Inc. ("Zenith") because the effect of the agreements was to preserve Abbott's monopoly position in the market for the drug terazosin hydrochloride by keeping Geneva and Zenith's less expensive generic terazosin products off the market. The plaintiffs sought class certification for their antitrust claims under Rule 23(b)(3)³ of the Federal Rules of Civil Procedure, and on September 20, 2001, the district court granted the plaintiffs' consolidated motions. In re Terazosin Hydrochloride Antitrust Litigation, 203 F.R.D. 551 (S.D.Fla.2001).⁴ Pursuant to Rule 23(f)⁵, we permitted Abbott and Zenith to appeal the district court's ruling.⁶ We now vacate the district court's decision and remand the case for further proceedings.

I.

The facts of this case have been discussed extensively both by the district court and by this court in a companion case, Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 No. 02-12091 (11th Cir. 2003).⁷ For the sake of efficiency, this opinion will discuss those facts that are most pertinent to the class certification question before us.

In 1987, Abbott began exclusively marketing the chemical compound, terazosin hydrochloride, under the trademark name "Hytrin." Hytrin, which is used in the treatment of hypertension and benign prostatic hyperplasia, proved to be a profitable drug for the company. According to the Federal Trade Commission ("FTC"), Hytrin generated $540 million in sales for Abbott in 1998 alone. This figure constituted more than twenty percent of Abbott's net sales of pharmaceutical products in the United States that year. In re Terazosin Hydrochloride Antitrust Litigation, 164 F.Supp.2d 1340, 1343 (S.D.Fla. 2000) (hereinafter "In re Terazosin Hydrochloride I"), rev'd Valley Drug v. Geneva Pharmaceuticals, Inc., No. 02-12091 344 F.3d 1294 (11th Cir. Sept. 15, 2003).

The commercial success of Hytrin predictably whetted the appetites of generic drug manufacturers who are in the business of developing products that have similar chemical properties to successful pharmaceutical drugs but cost less than the original, and hence are usually more attractive to consumers (or at least their health maintenance organizations). In 1990, one generic drug maker, Geneva, began to take steps to create a terazosin hydrochloride drug that would contain the same active ingredients but different inactive ingredients from those used in Hytrin. Like Hytrin, the generic drug developed by Geneva would be sold and marketed in tablet and capsule form.

Although in some contexts imitation may be the sincerest form of flattery, in the pharmaceutical industry imitation is almost invariably the subject of robust litigation because imitation, in the form of generic drug competition, often severely threatens to dissipate the profits a company gains from sales of the original, patented drug. The scenario between Abbott and Geneva conformed to this pattern: shortly after Abbott received notice of Geneva's intended challenge to its patents, the company exercised its statutory right to sue Geneva for patent infringement by initiating several actions against Geneva in the United States District Court for the Northern District of Illinois.⁸ The ensuing litigation between the parties delayed Geneva's efforts to market its own generic drug for an indefinite period of time pending resolution of the parties' ongoing patent disputes.

In June 1994, Zenith also emerged as a contender in the race to bring the first generic terazosin hydrochloride drug to market when it filed an Abbreviated New Drug Application ("ANDA") for a terazosin hydrochloride drug that challenged one of Abbott's Hytrin patents.⁹ After Abbott learned of Zenith's challenge, it promptly brought two suits against Zenith for patent infringement. Thus, from 1994 onwards, Abbott found itself involved in concurrent disputes with both Geneva and Zenith over the validity of its Hytrin patents while Geneva and Zenith competed with each other to bring the first generic terazosin hydrochloride drug to market.¹⁰

As mentioned before, the somewhat complex history of Abbott's legal disputes with Geneva and Zenith concerning the validity of Abbott's Hytrin patents has been thoroughly covered by this circuit in Valley Drug and by the district court in In re Terazosin Hydrochloride Litigation I. For present purposes, suffice it is to say that in late March and early April 1998, Abbott ultimately entered into separate, confidential, settlement agreements with both Zenith (March 31) and Geneva (April 1) to resolve its ongoing patent litigation disputes with the two generic drug manufacturers. These agreements terminated on August 13, 1999, apparently in response to a FTC investigation of the agreements, which resulted in a consent settlement. See Matter of Abbott Labs., No. C-3945 (F.T.C. May 22, 2000), also available at http://www.ftc.gov/os/2000/05/c3945.do.htm.

Plaintiffs are regional wholesalers who purchased Hytrin directly from Abbott during the period the defendants' agreements were in effect. They characterize the defendants' settlement agreements as "illegal" market-allocation arrangements that harmed direct purchasers of Hytrin by causing them to be overcharged by (1) keeping interchangeable, but less expensive, generic versions of Hytrin off the market; and (2) causing direct purchasers to lose discounts on Hytrin that they might have received if the settlement agreements had not shielded Abbott from generic competition. The district court agreed with the plaintiffs and granted them partial summary judgment on the issue of whether the defendants' settlement agreements constituted per se violations of § 1 of the Sherman Act. In re Terazosin Hydrochloride I.¹¹

On November 30, 1999, the plaintiffs moved for class certification on behalf of all persons who directly purchased terazosin hydrochloride from Abbott during the period March 31, 1998 through the time when the settlement agreements terminated. The district court granted plaintiffs' consolidated motions for class certification on September 20, 2001, and sua sponte amended the order on September 28, to define the class as "all entities who purchased Hytrin, also known by the chemical name terazosin hydrochloride, directly from Abbott at any time during the period commencing March 31, 1998, through August 13, 1999." In re Terazosin Hydrochloride Antitrust Litig., 203 F.R.D. 551 (S.D.Fla.2001) (hereinafter "In re Terazosin Hydrochloride II").

On appeal, the defendants raise a number of issues which can be condensed into two questions: (1) whether the district court erred in accepting an "overcharge" methodology for measuring impact and damages where generic drugs and branded drugs allegedly constitute separate, economically differentiated products, and (2) whether the district court erred by foreclosing discovery on the question of whether some class members benefitted from the conduct alleged to have harmed the class members on the whole. We find that because the district court improperly certified the class, this case must be remanded to permit the parties to conduct further discovery on the important issue of whether some class members have separate, antagonistic interests from the named representatives. As this issue decides the case, we do not need to reach the other arguments presented to this court by the defendants.

II.

The burden of proof to establish the propriety of class certification rests with the advocate of the class....