Third Circuit Lamictal Ruling: ‘Payment’ Broader than Cash

Two years ago, in FTC v. Actavis, the Supreme Court ruled that a brand-name drug company’s payment to a generic firm to delay entering the market could violate the antitrust laws. Since that time, the most litigated issue in the lower courts has been what counts as a “payment.”

In King Drug Company v. Smithkline Beecham (known as the “Lamictal” case), Judge Walls of the New Jersey District Court granted defendants’ motion to dismiss on the grounds that payment is limited to cash. In particular, he found that a brand company’s promise not to enter the market with its own “authorized generic” that would compete with the “true” generic does not violate the antitrust laws.

On June 26, the Third Circuit held that payment includes more than just cash transfers. See King Drug Company v. Smithkline Beecham No. 14-12534 (3rd Cir., June 26, 2015). On behalf of 53 professors, the American Antitrust Institute, and Consumers Union, I submitted an amicus brief in the case.

Judge Scirica, in a unanimous decision, wrote that Glaxo’s promise to Teva not to introduce an authorized generic version of epilepsy-and-bipolar-disorder-treating Lamictal was an “unusual, unexplained reverse transfer of considerable value.” And the court held that this transfer could “give rise to the inference that it is a payment to eliminate the risk of competition.”

The Third Circuit found that a no-authorized-generic clause is “likely to present the same type of problems as reverse payments of cash.” Such an agreement could be “worth several hundred million dollars” to the generic and “transfer the profits the patentee would have made from its authorized generic to the settling generic.” Nor could the arrangement be characterized only as an “early entry” agreement, but instead (with the court relying on the language of Actavis) it could “induce the generic to abandon the patent fight,” in other words, “prevent the risk of competition.”

The Third Circuit also rejected the settling parties’ argument that a no-authorized-generic clause is merely an exclusive license authorized under the patent laws. The court first pointed out that this was not technically a exclusive license since the brand could enter the market along with the settling generic. And more fundamentally, it explained that such an agreement employed “the right to use valuable licensing in such a way as to induce a patent challenger’s delay.” The court explained that under Actavis, “even exclusive licenses cannot avoid antitrust scrutiny where they are used in anticompetitive ways.”

The court found that “plaintiffs have sufficiently alleged that any procompetitive aspects of the . . . arrangement were outweighed by the anticompetitive harm.” The court also held that the district court erred in concluding that the agreement was reasonable, as such a conclusion was reserved for the ultimate fact finder. And it articulated the burdens in a Rule-of-Reason analysis, with the plaintiff bearing the initial burden of proving a payment to prevent the risk of competition, followed by the defendant’s burden to offer a justification for the settlement, followed by the plaintiff’s rebuttal of the defendant’s justification.

In the two years since the Actavis decision, courts have differed over whether payment includes more than just cash. In offering the first federal appellate ruling on the issue and one tied to the language of Actavis and rooted in the economics of the pharmaceutical industry and common sense, the Lamictal ruling will be influential in the months and years to come.