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Second Circuit Affirms Dismissal Of “Pay For Delay” Case Alleging Patent Litigation Settlement Between Pharmaceutical Company And Generic Manufacturers Violated Antitrust Law
05/29/2024On May 13, 2024, the United States Court of Appeals for the Second Circuit upheld the dismissal (with prejudice) of a lawsuit that alleged certain “reverse payments” made by a patent-holding pharmaceutical company to competitor generic manufacturers to settle patent infringement litigation constituted an antitrust violation under Sections 1 and 2 of the Sherman Act (among others). In applying the seminal test articulated by the Supreme Court in Actavis (2013) for such “pay for delay” cases, plaintiffs failed to show that the reverse payments constituted unlawful expenditures paid to avoid competition with generic product. Watson Lab’ys, Inc., No. 23-410, 2024 WL 2118248, at *11 (2d Cir. 2024) (consolidated by the district court as In re Bystolic Antitrust Litigation).
Reverse payments are a unique settlement arrangement whereby a patent-holding plaintiff pays the alleged patent-infringing defendant/s even though the patent infringer has no claim to damages. In 2013, the Supreme Court held that reverse payments may be unlawful under antitrust laws where they are both “large” and “unjustified” as evaluated under a “rule of reason” standard whereby courts balance anticompetitive effects against procompetitive benefits. FTC v. Actavis, Inc., 570 U.S. 136, 158 (2013). Applying this test, the Supreme Court further instructed that the analysis depends on: (i) the payment’s size, (ii) the payment’s scale relative to anticipated litigation costs for the payor, (iii) the payment’s independence from payment for other services, and (iv) the payor’s other asserted justifications for the payment.
In the present case, plaintiffs (a class of purchasers, wholesalers, and employee benefit funds) claimed that they had overpaid for the patented hypertension drug Bystolic as a result of the brand manufacturer’s reverse payments to generic manufacturers (collectively, defendants) that unlawfully delayed the launch of generic-competitors and prolonged the brand manufacturer’s ability to reap monopoly profits. The United States District Court for the Southern District of New York twice dismissed the case on the basis that plaintiffs had failed to show that the payments were both large and unjustified. Plaintiffs appealed to the Second Circuit with the amended complaint substantially unchanged.
The Second Circuit panel (Judge Dennis Jacobs writing) unanimously affirmed the District Court’s decision agreeing that plaintiffs failed to plausibly allege that the reverse payments were “unjustified” within the meaning articulated in Actavis. Relevantly, the Second Circuit held that the reverse payments reflected bona fide business considerations because neither the commercial terms nor plaintiffs’ “speculation and supposition” as to the underlying rationale constituted a plausible basis to infer that defendants paid counterparties to avoid competition. Further, defendants had sufficiently supported the purported business justifications for the payments (e.g., payments to achieve product developmental objectives aligned with commercial rationales).
The Second Circuit deemed it unnecessary to consider whether the payment met the threshold for “large” under Actavis because plaintiffs’ claim failed the “unjustified” prong. However, the Court highlighted that plaintiffs failed to “sufficiently contextualize” the size of the reverse payments, and thus the Court could not plausibly infer that the payments were unjustified.
Thus, the Second Circuit determined that there was no plausible basis to infer that the reverse payments were made for the sole purpose of disposing of the patent suit and delaying entrance of generic products into the market. This case is the first time the Second Circuit has applied Actavis to the merits of a reverse payments case. Interestingly, the Court focused on the “intent” underpinning the reverse payments in analyzing whether they were “traditional settlement considerations” protected under Actavis, or illegal violations of antitrust law. Moreover, although the Court did not ultimately assess the “large” prong of Actavis, it noted that, given appropriate context for the relative size of the reverse payment, the Court may infer a payment to be “plausibly unjustified.” Taken together, the Court has provided future parties with some insight and guidance as to how the Courts might incorporate the context surrounding reverse payments.
