Health Law Daily Non-cash ‘reverse payment’ settlements may be subject toActavis scrutiny
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Tuesday, February 23, 2016

Non-cash ‘reverse payment’ settlements may be subject toActavis scrutiny

By Harold Bishop, J.D.

The First Circuit has reversed a decision by the Rhode Island district court that patent infringement settlements agreements are only subject to federal antitrust scrutiny where they involve reverse payments in pure cash form. The purchasers of a brand name drug challenged settlement agreements between the brand manufacturer and two generic competitors that involved non-cash considerations and in exchange for delaying entry of the generic versions into the market. The First Circuit held that the U.S. Supreme Court’s decision in FTC v. Actavis did not limit antitrust scrutiny to settlements involving only cash (In Re: Loestrin 24 FE Antitrust Litigation, February 22, 2016, Torruella, J.).

Underlying patent infringement settlements. Warner Chilcott (Warner) is a brand-name drug manufacturer that owns the patent covering the oral contraceptive Loestrin 24 Fe (Loestrin 24). When Watson Pharmaceuticals, Inc. (Watson) and Lupin Pharmaceuticals, Inc. (Lupin) notified Warner that they would each seek to introduce a generic version of Loestrin 24, Warner sued them both for patent infringement. In the Watson infringement suit, the parties settled on conditions that Watson would delay entry of its generic version of Loestrin 24 and, in exchange, received favorable promotional deals with Warner and promises that Warner would not introduce its own generic version of Loestrin 24. In the Lupin infringement suit, the parties settled on terms that Lupin would wait to introduce its generic Loestrin 24 in exchange for attorneys' fees and Warner's agreement to enter into favorable side deals with Lupin.

District court claims. In response to these settlements, certain corporations that purchased Loestrin 24 directly from Warner, and certain end payors, consisting of health and welfare benefit plans that have indirectly purchased, paid for, and provided reimbursement for their members' purchase of Loestrin 24, and individuals who purchased Loestrin 24 (purchasers) brought antitrust claims that the settlement agreements were violations of § 1 of the Sherman Act (15 U.S.C. § 1.1). The antitrust actions were consolidated and transferred to Rhode Island district court. They specifically contend that the Watson and Lupin settlement agreements constituted illegal restraints on trade under FTC v. Actavis, 133 S. Ct. 2223 (2013), which subjected certain patent settlement agreements between generic drug and brand-name drug manufacturers to antitrust scrutiny where they involve "reverse payments" (see U.S. Supreme Court Pay-for-delay settlements may violate antitrust laws, June 17, 2013). A reverse payment typically arises where a brand-name drug manufacturer pays the generic manufacturer to delay entry of its generic equivalent, thereby protecting the brand's market from generic competition.

District court decision. The question before the district court was whether, following Actavis, such settlement agreements are subject to federal antitrust scrutiny where they do not involve reverse payments in pure cash form. The district court decided that Actavis only applied to monetary reverse payments and dismissed because the purchasers had alleged the existence of non-cash reverse payments only.

On appeal. The First Circuit concluded that the district court erred in determining that non-monetary reverse payments do not fall under Actavis's scope. The district court’s determination that the reverse payments alleged in Actavis involved only cash payments was not so, according to the First Circuit. The court found that in Actavis the reverse payments involved side deals in which the generic manufacturers agreed to promote the brand name drug at issue in exchange for multi-million dollar payments from the brand manufacturer. According to the court, this fact alone demonstrated that the Supreme Court recognized that deal in which a brand manufacturer effectively overpays a generic manufacturer for services rendered, may qualify as a reverse payment subject to antitrust scrutiny and militates against limiting the Actavis decision to pure cash payments.

The court reasoned that a narrow construction of Actavis would give drug manufacturers carte blanche to negotiate anticompetitive settlements so long as they involve non-cash reverse payments. In addition, of the many district courts to have addressed this question, the overwhelming majority have declined to limitActavis to cash payments. The court recognized that although the value of non-cash reverse payments may be much more difficult for courts to compute than that of their cash counterparts, antitrust litigation often requires an elaborate inquiry into the reasonableness of a challenged business practice and, as a result, is extensive and complex.

The First Circuit reversed the district court and remanded the matter for the district court to determine if the purchasers adequately pled that the provisions at issue in the Watson and Lupin settlement agreements were unlawful reverse payments under Actavis. The First Circuit felt that the district court did not address adequately this issue.

The case is Nos. 14-2071 and 15-1250.

Attorneys: Neill Wilson Clark (Faruqi & Faruqi LLP), Maria F. Deaton (Lynch & Pine LLC) and Kristen Johnson (Hagens Berman Sobol Shapiro LLP) for American Sales Co., LLC, Rochester Drug Co-operative, Inc. Nicole J. Benjamin (Adler Pollock & Sheehan PC) and Peter J. Carney (White & Case LLP) for Warner Chilcott Co., LLC, Warner Chilcott Public Ltd. Co. and Warner Chilcott Holdings Co. III, Ltd.

Companies: American Sales Co., LLC; Rochester Drug Co-Operative, Inc.; Warner Chilcott Co., LLC; Warner Chilcott Public Ltd. Co.; Warner Chilcott Holdings Co. III, Ltd.; Watson Pharmaceuticals, Inc.; Lupin Pharmaceuticals, Inc.

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