Why Actavis Is Not Limited to Cash: Professors Brief in Lamictal

One of the most difficult issues in antitrust and patent law involves “pay for delay” or “exclusion payment” settlements in which a brand-name drug company pays a generic firm to settle patent litigation and delay entering the market. In the landmark case of FTC v. Actavis, the Supreme Court held that such settlements could have “significant anticompetitive effects” and violate the antitrust laws.

Despite the importance of the Court’s decision, several questions remain unanswered. One of the most crucial is what constitutes a payment. The district courts have split on this issue, and in In re Lamictal, Judge William Walls of the District of New Jersey ruled that “payment” under Actavis was limited to cash. The court concluded that “nothing in Actavis says that a settlement contains a reverse payment when it confers substantial financial benefits” and that “[b]oth the majority and the dissenting opinions reek with discussion of payment of money.” Id.

On behalf of 53 professors, the American Antitrust Institute, and Consumers Union, Steve Shadowen and I filed an amicus brief in the Third Circuit urging reversal of the district court’s opinion. We made five general points.

First, the Actavis decision is not limited to cash. The case itself involved not cash payments, but brand overpayments for generic services. In addition, the Supreme Court’s assertions on payments encompassed value from a generic’s reprieve from competition during its 180-day exclusivity period, as this period “can prove valuable, possibly ‘worth several hundred million dollars.’” Antitrust law makes clear that economic substance—not form—matters. And it does not make economic sense to apply Actavis to preclude antitrust scrutiny where, instead of overpaying for services, the brand pays the generic with real estate, gives the generic a lucrative business deal for free, or agrees not to launch its own generic version (known as an “authorized generic”).

Second, a brand’s agreement not to launch an authorized generic is immensely valuable to a generic. This form of settlement has become increasingly common, with nearly half of all recent exclusion-payment agreements involving such promises. Generics lose significant market share when they compete with authorized generics during the exclusivity period, and suffer revenue reductions of 40% to 52% on average, in addition to continuing effects after the exclusivity period. As the Supreme Court recognized, brand promises not to introduce authorized generics could be worth hundreds of millions of dollars to generics.

Third, the brand in this case (GlaxoSmithKline or GSK) and generic (Teva) allocated the market by exchanging reciprocal non-competition pledges. Teva agreed to delay its entry into the market. In exchange, GSK agreed not to introduce a generic version of its product that would have competed against Teva during its 180-day exclusivity period. The agreement thus had a sinister symmetry: Teva’s delayed-entry pledge transformed a period of two-seller rivalry for the Lamictal product (which treats epilepsy and bipolar disorder) into an extended monopoly period for GSK, while the no-authorized-generic pledge transformed the 180-day period from a three-way rivalry into a two-way rivalry (with a monopoly for Teva in the generics sector).

Fourth, GSK’s no-authorized-generic pledge provided value that Teva could not have received by winning the patent case. Many settlements today provide the generic with—as shown in a test I developed here—a type of consideration not available as a consequence of winning the patent lawsuit. This case does not involve a generic receiving legitimate consideration in the form of entry before the end of the patent term. Instead, the generic obtains something it could not have received even if it had won its patent challenge, as a court ruling that the patent was invalid or not infringed does not allow the generic to prevent a brand from introducing an authorized generic.

Fifth, the district court applied an analytical framework that directly contravened Actavis. It used five factors that the Supreme Court invoked to require heightened scrutiny to instead justify reduced scrutiny. And just to mention a few of its other errors: (1) its suggestion that the no-authorized-generic promise covered “a relatively brief six months” ignores the well-known economics of the pharmaceutical industry and Actavis’s acknowledgement that “the vast majority of potential profits . . . materialize during the 180–day exclusivity period”; (2) the court found that “the consideration which the parties exchanged . . . is reasonably related to the removal of the uncertainty created by the dispute” even though Actavis was unambiguous in instructing that eliminating the risk that the patent would be found invalid or not infringed is anticompetitive, not procompetitive; and (3) the court divined, on its mere say-so, an absence of a harmful “intent” even though Actavis never created such a defense and the payment occurred immediately after a court had ruled that a claim of the patent covering the drug’s active ingredient was invalid.

In short, even if no-authorized-generic promises do not appear as blatant as cash payments, their anticompetitive bite is just as strong. Limiting Actavis to cash payments is not consistent with fundamental economics, antitrust law, or the Actavis decision itself.


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