By Mark Engstrom, J.D.
Direct purchasers and end-payors of the prescription drug propranolol hydrochloride—the generic equivalent of the branded drug Inderal—could proceed with a putative class action lawsuit against a dozen pharmaceutical companies that allegedly violated federal antitrust laws by conspiring to fix the price of the generic, the federal district court in New York City has ruled. Because the "plus" factors that the plaintiffs had identified in their consolidated complaint plausibly alleged an illegal conspiracy to fix the prices of propranolol in 2013 and 2015, the dismissal of their claims under Section 1 of the Sherman Act was unwarranted. State law claims for antitrust and consumer protection violations were dismissed in part and retained in part (In re Propranolol Antitrust Litigation, April 6, 2017, Rakoff, J.).
Parties. Plaintiffs KW Holdings and Cesar Castillo Inc. were direct purchasers of generic propranolol, and Sergeants Benevolent Association Health & Welfare Fund and the American Federation of State, County, and Municipal Employees District Council 37 Health & Security Plan were end-payors of that drug. A consolidated complaint alleged two price-fixing conspiracies with a single overlapping defendant (Actavis Elizabeth, LLC). One conspiracy involved the manipulation of prices for the capsule form of generic propranolol, and the other conspiracy involved the manipulation of prices for the tablet form of the drug.
The defendants in the "Capsules Conspiracy" were Actavis, Breckenridge Pharmaceuticals, and Upsher-Smith Laboratories (collectively, the "Capsules Defendants") and the defendants in the "Tablets Conspiracy" were: (1) Mylan Inc., Mylan Pharmaceuticals, and UDL Laboratories (collectively, "Mylan"); (2) Teva Pharmaceuticals USA Inc. and Pliva, Inc. (collectively, "Teva"); (3) Endo International PLC, Par Pharmaceuticals Holdings, and Qualitest Pharmaceuticals, Inc. (collectively, "Par"); (4) Heritage Pharmaceuticals; and (5) Actavis (altogether, the "Tablets Defendants").
Sherman Act claims. The court noted that a conspiratorial agreement could be inferred on the basis of "conscious parallelism" if interdependent conduct was accompanied by circumstantial evidence and "plus factors." In this case, the plaintiffs identified four plus factors: (1) the defendants had a motive to increase prices because they were operating in an oligopolistic market that was characterized by falling prices; (2) the defendants’ price increases were against their own self-interest because, in a competitive market, the defendants should have tried to undercut each other’s prices to increase their market share; (3) the defendants frequently communicated at trade association meetings; and (4) state and federal investigations for the manipulation of generic drug prices, including the price of propranolol, were ongoing.
Motive. The court acknowledged that that the bare allegation that the defendants were operating in an oligopolistic market was insufficient to establish a common motive to conspire. A plaintiff had to allege facts that were specific to the market at issue, the court explained, to indicate that the defendants had an incentive to manipulate prices.
In this case, however, the plaintiffs had alleged those market-specific factors. More specifically, the pleadings had alleged that, because federal law required each generic to be "readily substitutable for another generic of the same brand drug," competition would cause pricing in a mature generic market—such as the market for propranolol—to fall until it neared the generic manufacturers’ marginal costs of production. The data cited in the pleadings confirmed that trend, the court noted, and showed that the prices of propranolol capsules and tablets were either falling or stabilizing prior to the alleged conspiracies. Because the gradual devaluation of propranolol had caused the defendants’ profits to decline and flatten over time, the defendants had a common motive to conspire.
In the court’s view, the pleadings identified a regulatory regime that had pushed the price of propranolol downwards, had gradually reduced the defendants’ profits, and had given the defendants a common motive to conspire.
Self interest. The plaintiffs argued that defendants could not have sustained their market-wide price increases without an unlawful agreement because, in a competitive industry, a firm would have cut its price with the hope of increasing its market share if its competitors were setting prices above marginal costs. That was particularly true when one considered the magnitude of the defendants’ price increases (nearly 1,736 percent), the plaintiffs added, and the fact that propranolol was identical across manufacturers. A rational competitor would have kept its prices stable and vastly increased its market share.
The defendants challenged the pricing information in the plaintiffs’ pleadings because it did not reflect their actual prices. They failed, however, to identify any other information that they considered accurate, and thus "left themselves with no pricing data that they can say they have followed." Ultimately, the plaintiffs alleged a pattern of price fixing that occurred over several years, and further alleged that there was no clear mechanism through which the defendants could legitimately and consistently monitor each other’s pricing activity. The defendants’ additional explanations for their price increases were "more grounded in the pleadings," but they failed to render the plaintiffs’ allegations implausible.
For those reasons, the court concluded that the plaintiffs had plausibly alleged that the defendants’ price increases for propranolol were against defendants’ self-interest.
Interfirm communications. The plaintiffs’ pleadings extensively described the defendants’ participation in trade association meetings over a course of years, the dates of those conferences, the names of the defendants’ attendees, and the job titles of those attendees. The pleadings further alleged that the defendants’ representatives had "discussions" at those meetings and used them to discuss and share upcoming bids, specific generic drug markets, pricing strategies, pricing terms in customer contracts, and other competitively sensitive information.
The court concluded that the plaintiffs’ pleadings were not conclusory. Instead, they alleged that the defendants’ attendees were responsible for setting drug prices, and further alleged that the stated purposes of the conferences were to provide peer-to-peer connections, strategic business discussions, and one-on-one strategic meetings. In the court’s view, the plaintiffs had alleged "far more" than the mere opportunity to conspire, and thus had shown a "high level of interfirm communications."
Ongoing investigations. The court found that government investigations implicated the plaintiffs’ pleadings in two material ways. First, the Justice Department had expanded an existing investigation to include propranolol, and had sought a partial stay of discovery in the instant case because the plaintiffs’ price-fixing claims "overlap[ped] substantially" with an aspect of its criminal investigation. According to the court, the presence of an ongoing investigation into the same subject matter that was alleged in the pleadings raised an inference of a conspiracy.
Second, the former CEO and the former president of defendant Heritage Pharmaceuticals had both pleaded guilty to price fixing. Although their pleas did not involve propranolol, they did provide circumstantial evidence of motive, actions against interest, and interfirm communications, according to the court.
Plus factors result. Taken as a whole, the plus factors plausibly indicated that the defendants had illegally conspired to fix the prices of propranolol capsules and tablets in 2013 and 2015, the court concluded. The defendants’ motion to dismiss the plaintiffs’ claims under Section 1 of the Sherman Act was therefore denied.
State antitrust claims. To establish standing under their state antitrust claims, the end-payors had to show that: (1) they were "efficient enforcers" of the antitrust claims and (2) they had suffered an injury in fact.
The court evaluated four "efficient enforcer" factors—the directness or indirectness of the asserted injury, the existence of an identifiable class of persons whose self interest would normally motivate them to vindicate the public interest in antitrust enforcement, the speculative nature of the alleged injury, and the difficulty of identifying and apportioning damages to avoid duplicative recoveries—and concluded that the end-payors had satisfied each of those factors.
The defendants challenged the injury-in-fact element of the end-payors’ standing requirement, arguing that the end-payors failed to allege that they had purchased or provided reimbursement for propranolol in any state other than New York, and thus lacked Article III standing to sue under the laws of any state other than New York. The court partially agreed.
The end-payors alleged that they had indirectly purchased, paid for, and reimbursed for generic propranolol in 17 states, which was sufficient to establish standing under the laws of those states, but they failed to allege that they had indirectly purchased, paid for, or reimbursed for propranolol in the 10 remaining states that were named in the consolidated complaint. Instead, the end-payors argued that the court should defer the standing question until after class certification. The court was unpersuaded.
Because the parties did not dispute that the end-payors had standing under New York law, the case would proceed, irrespective of the court’s decision on class certification. Consequently, it was inappropriate to defer the standing issue until after class certification, even though some courts in the Second Circuit had held otherwise under similar circumstances.
Significantly, in determining whether a plaintiff had Article III standing, courts in class action lawsuits had to analyze the injuries that were allegedly suffered by the named plaintiffs, not the injuries of the unnamed members of a potential class. Because plaintiffs had to possess standing for each asserted claim, each state law claim had to be accompanied by a named plaintiff who had suffered an injury under that state’s statute, the court explained, and class certification did not remedy that requirement. For that reason, the court dismissed the end-payors’ claims under the antitrust laws of 12 states and the District of Columbia.
For the remaining state antitrust laws that the end-payors had standing to pursue, the court dismissed their claim under Alabama law (which required plaintiffs to allege intrastate price-fixing conduct) and Kansas law (for conspiracy to manipulate the price of capsules, because Kansas law imposed a three-year statute of limitations that barred the end-payors’ capsule-related claims).
Other state law claims. The court dismissed the end-payors’ claims under the consumer protection laws of nine states: Arkansas, Montana, Nebraska, New Mexico, New York, California, Illinois, South Carolina, and Vermont. It refused, however, to dismiss their unjust enrichment claims under any state law. Although the defendants argued that the end-payors’ unjust enrichment claims could not proceed because they failed to specify the state laws under which those claims were brought, the court found that any such identification was unnecessary at the pleading stage because the elements of unjust enrichment were similar in every state.
The case is Nos. 16-cv-09901 (JSR) and 17-cv-01039 (JSR).
Attorneys: Dan Drachler (Zwerling, Schachter & Zwerling, LLP) and David Taylor Rudolph (Lieff, Cabraser, Heimann & Bernstein, LLP) for American Federation of State, County, and Municipal Employees District Council 37 Health & Security Plan. Hector Torres (Kasowitz, Benson, Torres & Friedman, LLP) for Actavis Elizabeth LLC, Teva Pharmaceuticals USA Inc., and Teva Pharmaceutical Industries Ltd.
Companies: FKW Holdings; Cesar Castillo Inc.; Sergeants Benevolent Association Health & Welfare Fund; American Federation of State, County, and Municipal Employees District Council 37 Health & Security Plan; Actavis Elizabeth, LLC; Breckenridge Pharmaceuticals, Inc.; Upsher-Smith Laboratories, Inc.; Mylan Inc.; Mylan Pharmaceuticals Inc.; UDL Laboratories, Inc.; Teva Pharmaceuticals USA, Inc.; Pliva, Inc.; Endo International PLC; Par Pharmaceuticals Holdings, Inc.; Qualitest Pharmaceuticals, Inc.; Heritage Pharmaceuticals Inc.
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