By Kevin E. Noonan —

In the lastest instance of a plaintiff attempting to extend the Supreme Court's holding in FTC v. Actavis that "reverse payment" settlement agreements in ANDA litigation could be anticompetitive and violate the antitrust laws, the District Court of New Jersey (P. Sheridan, J.) granted defendants' motion to dismiss under Fed. R. Civ. Pro. 12(b)(6) for failure to state a claim (Memorandum).  While acknowledging that the Court's Actavis decision could apply to agreements where consideration other than money was exchanged between a branded drug company and its generic drug challenger, the District Court held that the quanta of alleged facts must be sufficient to support the antitrust allegations.

The lawsuit involved Pfizer's Lipitor® drug (atorvastatin calcium), which was so profitable at the time that Plaintiffs' alleged sales amounted to $ 1 billion per month.  These plaintiffs were placed by the Court into four groups = (1) a proposed class of direct purchaser plaintiffs asserting claims under the Sherman Act ("Direct Purchaser Plaintiffs"); (2) several opt-out groups of direct purchaser plaintiffs asserting nearly identical claims to the direct purchaser class; (3) a proposed class of end-payor plaintiffs asserting claims under various states' laws; and (4) the RP Healthcare plaintiffs, a group of pharmacist plaintiffs, asserting claims under California law.  This case only involved the "Direct Purchaser Plaintiffs," namely:  Stephen L. LaFrance Holdings, Inc.; Stephen L. LaFrance Pharmacy, Inc. d/b/a SAJ Distributors; McKesson Corp., SAJ's assignor; Burlington Drug Co., Inc.; Value Drug Company; Professional Drug Company, Inc.; Rochester Drug Co-Operative, Inc.; American Sales Company LLC; and Cardinal Health, Inc., American Sales Company's assignor.  Defendants were the parties to the ANDA settlement agreement: Pfizer, Inc., Pfizer Manufacturing Ireland (formerly known as Pfizer Ireland Pharmaceuticals and previously Warner Lambert Export, Ltd.), and Warner-Lambert Company, the branded drug companies; and generic drugmakers Ranbaxy Inc., Ranbaxy Pharmaceuticals, Inc., and Ranbaxy Laboratories Ltd.

This settlement agreement was highly complex, encompassing  three separate ANDA litigations as well as more than two dozen other actions in foreign jurisdictions, and involving Pfizer drugs Accupril® and Caduet® as well as Lipitor®.  The Lipitor® ANDA litigation involved seven patents:  U.S. Patent No. 4,681,893 (the "'893 patent") and U.S. Patent No. 5,273,995 (the "'995 patent," reissued later as U.S. Reissue Patent No. 40,667), directed to the active pharmaceutical agent (API); U.S. Patent No. 6,126,971 (the "'971 patent"), U.S. Patent No. 5,686,104 (the "'104 patent"), directed to formulations (the "Formulation Patents"); U.S. Patent No. 6,087,511 (the "'511 patent"), and U.S. Patent No. 6,274,740 (the "'740 patent"), directed to specific processes of making amorphous atorvastatin calcium using crystalline Form I atorvastatin as a starting material (the "Process Patents"); and U.S. Patent No. 5,969,156 (the "'156 patent"), directed to the crystalline form of the API.  The API patents and the Formulation Patents were listed in the Orange Book, while the Process Patents were ineligible for listing.

Ranbaxy was the first ANDA filer, and its Paragraph IV letter with regard to the '893, '995, '156, '971 and '104 patents asserted non-infringement based on its ANDA for sale of amorphous (not crystalline) Lipitor®.  In the underlying ANDA case, Ranbaxy failed on all its validity and unenforceability challenges as to product patents, which the Federal Circuit affirmed as to the '893 patent and reversed as to validity of asserted claim 6 of '995 patent.  Thereafter the District Court entered an injunction that kept Ranbaxy off the market until March 24, 2010, and Pfizer filed for and obtained reissue patent No. RE40,667 based on the '995 patent.  (Pfizer also filed a declaratory judgment action as to the Process Patents which settled outside ANDA context and the settlement agreement at issue here.)

In the first Accupril® litigation (Accupril I), Teva was the first ANDA filer and Ranbaxy the second filer over U.S. Patent No. 4,743,450.  In that action, Pfizer was awarded summary judgment against Teva, with the District Court rejecting all Teva's validity and unenforceability assertions.  The second Accupril litigation (Accupril II) resulted from an exclusive "distribution and supply agreement" between Teva and Ranbaxy, in return for which Teva gave up its rights to the 180 day exclusivity period as first filer.  Ranbaxy launched "at risk" based on structural distinctions between Pfizer's approved drug and its generic drug and the District Court granted Pfizer an injunction keeping Ranbaxy's generic Accupril off the market.  This action was included in the settlement agreement at issue here.

In the Caduet® litigation, the accused generic drug was a combination of atorvastatin and amlodipine (and thus subject to infringement liability for the '893 patent); there was also a related declaratory judgment action involving the Process Patents and both actions were part of the settlement agreement before the Court.

That settlement agreement was a "non-monetary" reverse payment, that contained terms "absolving Ranbaxy of damages accrued from Accupril litigation" and "resolved and terminated patent litigation on the three drugs Lipitor®, Caduet® and Accupril®."  Under the terms of the agreement, "the U.S. actions [falling under the scope of the settlement] were the Accupril II litigation, Lipitor Process litigation, Caduet ANDA litigation, and Caduet Process litigation" as well as all (26) foreign litigations between the companies.  The agreement delayed generic entry into the Lipitor market until November 30, 2011 (a 20 month delay from the earlier District Court injunction) and contained a promise by Ranbaxy not to challenge the Process Patents (the '511 or the '740 patents).  Generic entry of Caduet was also delayed until November 30, 2011 and also contained an agreement not to challenge the relevant patents.  Regarding damages for the "at risk" Accupril® sales, Ranbaxy paid Pfizer $1M.  Finally, Pfizer agreed to be Ranbaxy's API supplier for Lipitor, and Ranbaxy changed its formulation to (putatively infringing) crystalline atorvastatin calcium instead of the amorphous form.

The case was consolidated in the District of New Jersey by the Panel for Multidistrict Litigation, and defendants filed motions to dismiss by defendants under Fed. R. Civ. Proc. 12(b)(6), directed to the class of "Direct Purchaser Plaintiffs."  Prior to these motions, the Court had dismissed "Walker Process" and sham litigation claims, as well as Sherman Act Section 2 allegations.  Thereafter the only claim left against defendants was the reverse payment claim.  The Court allowed limited discovery while this action was stayed awaiting the Actavis decision and permitted Plaintiffs to file an amended complaint after the Supreme Court rendered its decision in the Actavis case.  That amended complaint asserted three causes of action:  Count I alleged violation of Section 1 of the Sherman Act for an "[a]greement in restraint of trade against all defendants."  Count II alleges violation of Section 2 of the Sherman Act for a "[c]onspiracy to monopolize against all defendants."  Count III alleged a violation of "15 U.S.C. §§ 1 and 2," but plaintiffs acknowledged that "the Court dismissed this count" and that it was being "restated here for purposes of appellate rights."  The Court thus addressed only the first two Counts in its decision.

The Court set forth the allegations made by Plaintiffs against defendants:

[T]he Plaintiffs contend that this Settlement Agreement was Pfizer and Ranbaxy's purposeful intent to restrain and monopolize trade by extending the Lipitor patent duration until November 30, 2011, when Ranbaxy's generic amorphous version would not have infringed the Lipitor process patents.  Plaintiff allege that this was accomplished by Pfizer forgiving its claim for infringement damages by settling the Accupril claim for $1 million when the value of the Accupril claim was far higher; and allowing the defendants to market generic Lipitor in foreign markets.  As a result, Ranbaxy agreed to delay entry of its generic until November 30, 2011.

In rendering its decision granting defendants' motions to dismiss, the Court discussed the Supreme Court's Actavis decision, which it said was based on the "atypical" posture of the reverse payment settlement agreement.  The Court considered the Actavis decision to reject the approach taken by both the 3rd Circuit (the "quick look" rule of reason antitrust standard) and the appellate consensus "scope of the patent" standard, in favor of a "rule of reason" approach "in order to strike a balance 'between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by the Sherman Act.'"  The Court then set forth the Supreme Court's "factors" for performing the "rule of reason" analysis for reverse payment settlement agreements of ANDA cases:

Sometimes there are types of settlements that do not fall within the Actavis rationale.  The Supreme Court provided two types of 'commonplace forms' of settlement that are not subject to Actavis scrutiny.  The first one is when A sues B for patent infringement and demands $100 million in damages; and then B pays A $40 million as settlement.  Actavis, 133 S. Ct. at 2233.  The "implicit net payment" or reduction in demand of $60 million by A does not trigger antitrust scrutiny.  Id.  The second situation occurs when B has a counterclaim for damages against A, the patentee, and A pays B to settle B's counterclaim.  Id.  Such settlements between a patentee and a generic manufacturer are permissible.

However, the Court also acknowledged that "[t]he Supreme Court left 'to the lower courts the structuring of the present rule-of-reason antitrust litigation.'  Id. at 2238."

Having stated its understanding of the proper analysis of the substantive antitrust issues, the Court then discussed the standard for granting motions to dismiss enunciated by the Supreme Court in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009).  Simply put, these decisions require that a complaint must assert evidence supporting entitlement to the relief requested, and cannot be merely conclusory statements or bare recitation of the elements of the cause of action.  In the Third Circuit, this precedent has been interpreted as a three part test:

[O]ur inquiry is normally broken into three parts:  (1) identifying the elements of the claim, (2) reviewing the complaint to strike conclusory allegations, and then (3) looking at the well-pleaded components of the complaint and evaluating whether all of the elements identified in part one of the inquiry are sufficiently alleged [citing Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011)].

The Court also noted that Twombly was itself an antitrust case and thus particularly relevant in its exhortation that a court determine whether a complaint has satisfied the requirement for factual pleadings as early in the litigation as possible to avoid wasted time for the court and expense for the parties (noting that it may take fewer facts to plausibly plead an auto accident than an antitrust or RICO claim).

The Court found that the five "backup" patents — "the '156 patent, the two Formulation Patents (the '971 and '104 patents), and the Process Patents (the '740 and '511 patents)" — were successfully designed around by Ranbaxy, based on, inter alia, Ranbaxy's Paragraph IV certification to the FDA.  The facts were thus sufficiently plead according to the Court; the question was whether the antitrust allegations were as well.  The Court identified "the heart of the issue" as being "whether there was a settlement agreement between Pfizer and Ranbaxy that constituted a [reverse settlement payment agreement] that warrants antitrust scrutiny."  In considering this question, the Court cited the several pejorative characterizations contained in the complaint, including that the settlement agreement constituted a "'sweetheart' agreement to dismiss damages claims likely worth hundreds of millions of dollars in Accupril II litigation in exchange for a token 'pretextual' payment of $1 million"; and that settlement of the Process Patent infringement was included to "disguise the [Agreement's] true anticompetitive purpose" (the complaint does not make any allegations regarding settlement of the Caduet Process litigation and the Caduet ANDA litigation, or the twenty-three foreign actions pending at the time of the Settlement Agreement).  The complaint also alleged that Ranbaxy did not "relinquish or selectively waive" its 180-day exclusivity term, creating a "bottleneck" having the effect of blocking generic entry by any other generic drugmaker.

The Court gave little weight to these characterizations, based on their lack of relevance to factual allegations.  Rather, the Court invoked the Supreme Court's Actavis decision for the rubric that it must "examine[] whether the factual allegations are sufficient to make plausible that Pfizer made a large and unexplained reverse payment to Ranbaxy in support of antitrust activities."

Turning to the matter of the reverse payment, the Court in a masterful understatement explained that the Actavis decision "does not define payment or provide any clarity" regarding whether a "payment" that raises antitrust scrutiny can be anything other than a monetary payment.  Citing Third Circuit precedent as well as cases from other jurisdictions and even Black's Law Dictionary, the Court concluded that a "payment" could be anything sufficient to discharge a debt or obligation and was not limited to cash payments.  The Court found no consistent or persuasive authority for whether the Actavis decision required a payment of money between the parties.  However, the Court found that there must be a way to "convert" whatever was exchanged between the parties into a monetary equivalent in order to apply the Supreme Court's Actavis precedent.  The Court recognized that the Supreme Court's "general concern" enunciated in Actavis was whether there were "genuine adverse effects on competition" and that this was not limited to merely monetary arrangements.  However, the Court also recognized that the factual requirements needed to satisfy Rule 12(b)(6) are more extensive for non-monetary consideration between the parties.

Citing Twombly and Iqbal, the Court noted that the "flexible standard" contained in those cases could be met if "the pleading [] demonstrate[s a] reliable foundation showing a reliable cash value of the non-monetary payment," but that the Plaintiffs would need more facts than had been plead to meet that standard here.  Specifically, the Court asserted that Plaintiffs would need to establish a value for the non-monetary payments alleged in support of the complaint, consistent with its discussion earlier in the opinion.  The Court made reference to  Aaron Edlin, et al., Activating Actavis, 28 Antitrust 16, 18 (2013)  in setting forth the following factors:

The payment prong involves the following steps:  (a) valuing any consideration flowing from the patentee to the claimed infringer, which may be made over time and may take forms other than cash; (b) deducting from that payment the patent holder's avoided litigation costs; and (c) deducting from that payment the value of goods, services, or other consideration provided by the claimed infringer to the patent holder as part of the same transaction (or linked transactions).

The Court found that a "lack of any reliable foundation pervade[d] the entire Complaint."  The purported nature of value of the settlement was in part contingent, because the court in the Accupril II case had not ruled on whether the patents-in-suit were valid and enforceable.  In addition, the complaint alleged no facts relating to the amount of the damages Ranbaxy was at risk for incurring in the Accupril II case, and merely assumed these damages to be on the order of the $200 million bond Pfizer posted in support of its injunction for Ranbaxy's "at risk" sales or the difference in gross sales ($525 million vs. $70 million).  The Court found neither of these assumptions to be plausible.  Even if Plaintiffs had "relied on a reliable foundation (which Plaintiffs did not)," settlements must also be assessed with regard to the parties' own assessment of their risk, including for example "the branded company's perceived probability of winning the patent litigation; the branded company's monopoly profits and duopoly profits (if the generic were to enter the relevant market); the remaining lifetime of the patent at issue and the proposed market entry date for the generic manufacturer; and the branded company's litigation costs and the amount of payment from the brand to the generic."  In addition, "Plaintiffs must allege a measure of damages accepted within the industry and a discussion of the settlement factors relating to the claim of damages settled at that time."

Turning to other factors, the Court found that there were close to no allegations relating to legal fees between the parties, which the Supreme Court stated should be deducted from any monetary compensation flowing from the branded pharmaceutical company to the generic drugmaker, because such compensation does not raise "the same concern that a patentee is using its monopoly profits to avoid the risk of patent infringement or a finding of noninfringement."  In view of the number of actions settled (foreign and domestic) and the costs to the generic company of these litigations (estimated by the Court to be $117-$260 million), the Court found Plaintiffs' complaint to be implausible without any assertion of the relevance of these savings to Ranbaxy's decision to settle.  The Court also noted that, while the Supreme Court did not define what was a "large" cash payment, "[o]ne way to measure the 'largeness' of a reverse payment is to assess whether the amount is larger than what the generic would gain in profits if it won the Paragraph IV litigation and entered the market," which can be "'strong evidence' of anticompetitive activity."  The Court found no such allegations in Plaintiffs amended complaint.  Finally, statements by Pfizer's former and current Chief Executive Officers did not rise to the level of probative evidence of antitrust intent, the Court said, because inter alia they were cited without context and were merely conclusory.

It is likely that Plaintiffs made the strategic decision not to address all of the aspects of the Settlement Agreement; if so this was a strategic error, because the Court also held that their complaint was not plausible because it did not evaluate the agreement as a whole as is necessary in applying the "rule of reason" to antitrust questions.  Specifically:

In order to analyze whether an alleged RSPA occurred to delay entry of generic Lipitor, as plaintiffs allege, the terms of the entire Settlement Agreement must be analyzed to determine plausibility.  To rely only on certain sections (Accupril) of the Settlement Agreement and disregard other sections (Caduet) is not a reasonable analysis.  The Complaint does not plead the Settlement Agreement as a whole.

Accordingly, the Court granted Defendant's motions to dismiss with prejudice because "Plaintiffs have failed to plead their Amended Complaint with the plausibility required by the Federal Rules of Civil Procedure and the relevant case law" even after being given the opportunity to conform their pleadings to Actavis and other Supreme Court precedent.

The Court sets forth the rule, insofar as their can be one, succinctly as follows:

Pursuant to Twombly and Iqbal, the standard for considering a motion to dismiss a complaint is a based upon a flexible pleading benchmark.  In this case, where Plaintiffs rely on a non-monetary reverse payment of an inchoate claim, they must plead plausible facts including an estimate the monetary value of same so the Actavis rationale can be applied.  The Plaintiffs have failed to delineate any type of methodology to connect the claim to its monetary value.  To meet this standard, Plaintiffs must stand in the shoes of the underlying parties at the time of the settlement, and determine an estimate of the monetary value of the settlement at that time.

This case illustrates the consequence of the Court's jurisprudential decision to permit the contours of its Actavis decision to be "worked out" in district and appellate courts below (much like the PTO and the courts will be working out the differences between the Federal Circuit's "insolubly ambiguous" and the Supreme Court's "reasonable certainty" standards for indefiniteness established in Nautilis v. Biosig).  It also illustrates the consequences of the Supreme Court asserting its authority to be the final arbiter of patent law questions over the Federal Circuit, and changing a specialized court for a generalist one.  While perfectly proper under the Constitution, this change has produced and will continue to produce uncertainties that can be expected to seriously harm competition and innovation, two of the supposed reasons why the Court decided to reenter the patent law arena with such vigor.  Rarely has the Court's decisions had the potential for such harm to the American economy and global competitiveness.