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Hatch-Waxman/Antitrust: U.S. Court of Appeals for the Sixth Circuit Finds Generic Drug Agreement Illegal Under Antitrust Laws

June 2003
By Joseph M. Manak and James I. Serota, Greenberg Traurig, New York Office

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In re Cardizem CD Antitrust Litigation, 2003 Westlaw 21360049, (Sixth Cir. June 13, 2003), just decided that an agreement settling a patent infringement action between a patentee-manufacturer of Cardizem CD and an FDA-approved manufacturer of a generic version of Cardizem was a per se illegal naked horizontal restraint of trade under Section 1 of the Sherman Act.

Joseph M. Manak
"The conclusion was that the Agreement, all of its other conditions and provisions not withstanding, was at its core, a horizontal agreement to eliminate competition in the market."

The agreement provided that the generic manufacturer would stay off the market in exchange for payment of $89 Million. In exchange for minimum payments of $10 Million per quarter, the patentee manufacturer could eliminate all potential competitors, since the first generic manufacturer had an exclusive 180 day period of marketing exclusivity which it agreed not to relinquish or transfer. The court determined that there is "simply no escaping the conclusion that the Agreement, all of its other conditions and provisions not withstanding, was at its core, a horizontal agreement to eliminate competition in the market for Cardizem throughout the entire United States, a classic example of a per se illegal restraint of trade."

On appeal, Respondents principal argument was that the per se rule was inapplicable because the agreement was subject to pro-competitive justifications. In the Sixth Circuitís view, however, Respondents evinced a misunderstanding of the per se rule. In the opinion of both the trial court and the Sixth Circuit, the "anti-competitive potential inherent in all price-fixing agreements justifies their facial invalidation, even if procompetitive justifications are offered for some. Those claims of enhanced competition are so unlikely to prove significant in any particular case that we adhere to the rule of law as justified in its general application."

The facts, in summary, are as follows: In January 1996, the patent owner filed a patent infringement suit against the generic in the Southern District of California, asserting that United States Patent 5,470,584 was infringed by the genericís filing of an abbreviated new drug application ("ANDA") for a generic form of Cardizem CD. On September 15, 1997, the FDA tentatively approved the ANDA. On September 24, 1997, the patent owner and the generic entered into an agreement whereby the generic would not market a bioequivalent or generic version of Cardizem CD until the earliest of 1) a favorable and final and unappealable determination in the patent infringement case, 2) a license agreement between the patent owner and the generic or 3) the patent owner entering into a license agreement with a third party.

In June 1999, the FDA approved a reformulated product offered by the generic, and on the same day the patent owner and the generic entered into a stipulation settling the patent infringement case and terminating the agreement. At the time of settlement, the patent owner paid the generic a final sum of $50.7 Million, bringing its total payments to $89.83 Million. On June 23, 1999, the generic began to market its reformulated product and its 180 day period of market exclusivity began to run.

In August 1998, the first antitrust complaint challenging the legality of the patent owner/generic agreement was made. There were additional antitrust actions filed by state plaintiffs as well as indirect purchasers and class representatives, all of whom challenged the agreement under various provisions of the Sherman Act. The gist of the plaintiffsí claims was that but for the agreement, specifically the payment of $40 Million per year, the generic would have brought its generic product to market once it received FDA approval and at a lower price than the patented Cardizem CD sold by the patent owner. The plaintiffs brought a motion for summary judgment, claiming that the agreement was illegal under Section 1 of the Sherman Act and that they alleged an antitrust injury which satisfied the test articulated by the Supreme Court in Brunswick Corp. v. Pueblo Bowl-O-Mat Inc., 429 US 477, 489 (1977). In Brunswick, the Supreme Court defined antitrust injury as injury of the type the antitrust laws were intended to prevent, and as that which flows from what makes defendantís acts unlawful. (See Brunswick, 429 US at 489).

The District Court determined upon motion for summary judgment that in fact the agreement was per se illegal. The Court also refused to grant defendantís motion to dismiss, which alleged the plaintiffs had not pled an antitrust injury. After the ruling, the District Court also certified those two questions for interlocutory appeal. The Sixth Circuit made short shrift of the defendantís arguments regarding per se illegality. Quoting the Supreme Court in Copperweld Corp v. Independence Tube Corp., 467 U.S. 752, 768 (1984), "[c]ertain agreements, such as horizontal price fixing and market allocation are thought so inherently anti-competitive that each is illegal per se without inquiry into the harm it has actually caused." The Court further rejected the defendantís arguments of pro-competitive justifications indicating it was unlikely that enhanced competition would prove sufficiently significant such that it would be willing to deviate from the general rule of per se illegality against naked horizontal restraints such as price fixing and market allocation.

Applying the rule of antitrust injury, the Court of Appeals affirmed the trial courtís finding that the plaintiffís allegations fell easily within two critical Brunswick categories. First, the type of injury was the type of which the antitrust laws were to prevent. (During the period in which this agreement was effective, from July 1998 through June 1999, as a result of a payment of $89 Million, the original patentee kept off not only the generic product, but due to marketing exclusivity, all of its other generic competitors were kept at bay, thereby effectively eliminating all competition for one year.) As to the second Brunswick criteria, the Court easily determined that the alleged injury flowed from that which makes the defendantís acts unlawful, i.e., its anti-competitive effects.

Defendants also contended that, as a result of a Sixth Circuit decision in Hodges v. WSM, 26 F.3d 36, 39 (6th Cir. 1994), that the plaintiffs had failed to allege that the antitrust violation was a necessary predicate to their injury. The Court rejected the defendantís interpretation of "necessary predicate". In Hodges, the Court said that the plaintiffís must allege either that the antitrust violation was a necessary predicate to their injury or that the defendants could injure the plaintiffs only by engaging in an antitrust violation. Defendants contended that the generics would have stayed out of the market anyway, because of fear and risk of patent infringement litigation. In the Courtís view, the defendantsí interpretation conflates these options effectively requiring the plaintiffs to satisfy the second one, even if they have already satisfied the first. In other words, it is not necessary in order to allege an antitrust injury that the conduct was both a necessary predicate to the injury and that it was the only means by which the defendants could have injured the plaintiffs.

In sum, the Court determined that the complaints alleged a plain vanilla horizontal agreement to restrain trade in the form of a multi-million dollar cash payment in consideration for forbearance by the generic competitor from selling in the market a product that it was ready and able to sell at a price lower than that charged by the original patentee.

This decision is important to the pharmaceutical and biotech industries. Questions and comments may be directed to the authors in the New York office of Greenberg Traurig, LLP.


© 2003 Greenberg Traurig

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