Court: District Court, D. Connecticut; August 8, 2016; Federal District Court
In this multidistrict litigation stemming from the Supreme Court's decision in FTC v. Actavis, Inc., plaintiffs challenge a 'reverse payment' settlement concerning the antiplatelet drug Aggrenox, alleging it was unjustified and anticompetitive. The court, recognizing the complexities of discovery related to market power and relevant market definitions, mandated supplemental briefs and ordered defendants to demonstrate why discovery should not be limited to Aggrenox and its AB-rated bioequivalents. The ruling establishes that the relevant market is confined to Aggrenox and its generics, rendering evidence of other drugs irrelevant.
The Actavis decision is pivotal, as it permits claims against large reverse-payment settlements in patent-invalidity litigation, suggesting they may infringe antitrust laws if they suggest attempts to maintain supra-competitive prices. The Supreme Court emphasized the need for trial courts to structure antitrust litigation to effectively analyze the presence of significant unjustified anticompetitive consequences without being overly restrictive or excessively broad in their approach. Key factors influencing the likelihood of anticompetitive effects from reverse payments include the size of the payment, its relation to anticipated litigation costs, and its justification. While market power is not explicitly listed as a factor, the Court acknowledged that significant reverse payments likely indicate the patentee's market power, as only firms with such power would pay substantial sums to avoid competition. Thus, market power remains a critical component of antitrust analysis in this context.
Market power is defined primarily as the ability to raise prices above competitive levels without losing significant sales, which is essential for sustaining such price increases. Courts have previously linked market power to both the ability to control prices and the exclusion of competitors; however, this conflation can lead to confusion. For example, while a patent may allow for the exclusion of rivals, it does not inherently confer market power if consumers do not value the patented product or have adequate alternatives. The leading antitrust treatise specifies that true market power involves the capacity to sustain pricing above competitive levels over time without being undermined by new entrants or market expansion.
The context of reverse payments in patent litigation is examined, noting that such payments do not automatically indicate antitrust liability or guarantee market power. However, a larger reverse payment, especially if not tied to other legitimate compensations, could suggest that the patent confers considerable market power, thereby facilitating supracompetitive pricing. The implication is that the size and nature of these payments may reflect the market power attributed to the patent, which is crucial for incentivizing innovation. Additionally, in cases like those under F.T.C. v. Actavis, the relevant market is typically defined by the scope of the disputed patent, though the mere existence of a patent does not confirm market power, as competitive pressures from similar products may render the patent less valuable.
A large reverse payment in a legal context is a strong indicator of market power, as it suggests a firm's ability to maintain supracompetitive pricing without significant loss of sales. Market power exists on a spectrum; it is minimal when price increases lead to substantial sales losses and substantial when firms can profit from significant price hikes. Even with competition from imperfectly interchangeable drugs, a patented drug can still exhibit meaningful market power and be sold at supracompetitive prices.
The defendants argue that evidence of supracompetitive prices does not necessarily indicate market power, disputing the definition of 'supracompetitive' and claiming that price differentials between brand and generic drugs don't suffice as proof. They present two main arguments: first, that the analysis must account for substantial fixed costs, such as research and development expenses, which necessitate higher prices for brand manufacturers to recoup their investments; second, that the molecule in question faces competition from other drugs in the same therapeutic category, undermining claims of supracompetitive pricing.
The first argument, framed as economic reasoning, is effectively a policy argument suggesting that brand manufacturers need to exclude competition to recoup costs. While valid, this does not negate the classification of brand drug pricing as supracompetitive. Patents legally enable brand manufacturers to charge higher prices while maintaining a profit incentive for drug development. The defendants’ reliance on the case of United States v. Eastman Kodak Co. is noted, but it emphasizes that only ongoing fixed costs can explain price deviations from marginal cost—historical sunk costs do not. Ultimately, prices above marginal cost are deemed supracompetitive, and the existence of a price differential alone does not raise antitrust concerns unless it is analyzed in the context of actual competition.
Economic analysis can assess whether prices are supracompetitive by examining price and marginal cost, with references to established indices like the Lerner Index. Historical market data indicates that generics have entered the market, providing insight into pricing dynamics. It is posited that if competitive prices prevailed prior to the entry of generics, their introduction would not significantly alter prices. The central legal issue is not simply whether a patented drug was sold at a supracompetitive price, but whether that pricing was legally justified under patent protection without unlawful extension via reverse payment settlements.
Data regarding other drugs may be redundant and potentially misleading due to the Cellophane Fallacy, which could obscure the true market power of the defendant by suggesting that high prices are justified by consumer demand for substitutes. The existence of some substitution among drugs does not necessarily negate the defendant's market power, as limited competition can still result in supracompetitive pricing.
The defendants argue that Aggrenox competes within a broader antiplatelet drug market, suggesting it has limited market power. However, limited competition can coexist with market power, meaning that substitutability alone does not guarantee competitive pricing. If new entrants do not significantly impact average prices, it becomes challenging for plaintiffs to demonstrate anticompetitive effects. While robust competition among interchangeable products would drive prices down to marginal costs, the absence of substitutes could lead to significantly higher prices.
Aggrenox may face somewhat supracompetitive pricing due to competition with imperfectly interchangeable substitutes, but damages will be limited according to the level of effective competition present. Contrary to the defendants' claims, the existence of market power and supracompetitive pricing is acknowledged, especially in light of actual market data demonstrating the impact of generic entry on the price of the patented drug. The patent for Aggrenox allowed the company to exclude generic competition and charge higher prices legally; however, extending this ability unlawfully through significant reverse payments would constitute a violation of antitrust laws.
The primary issue for liability is whether the defendants wrongfully extended the patent monopoly beyond its valid term. The presence of a broader market that imposes some price limits on Aggrenox does not affect this case, as defining the relevant market serves primarily to assess market power, which correlates with potential adverse effects on competition. Proof of actual detrimental effects can bypass the need for extensive market analysis, supporting claims of unreasonable restraints without requiring elaborate market definitions.
Discovery motions filed by the defendants for data related to other antiplatelet drugs were denied, as such information is deemed irrelevant. Any competitive effects from these other drugs, if they exist, are already reflected in the prices of Aggrenox over time, negating the need for additional evidence.
Certain unresolved issues remain concerning motions related to downstream discovery, duplicative damages, and appropriate search terms for electronic discovery. The parties are instructed to confer regarding the impact of the ruling on these disputes to determine if they can be resolved collaboratively or if they should be addressed in the next semimonthly conference.
The ruling includes a Section 1292(b) certification, emphasizing that the Supreme Court's Actavis decision left significant gaps for lower courts to navigate in antitrust litigation. Many district courts have struggled with inconsistent interpretations since Actavis. This case is pivotal in establishing a framework for future cases, with substantial implications for both parties and the court. A reversal of this ruling post-judgment would necessitate a complete restart of the litigation process.
The order certifies the interlocutory appeal, affirming that it involves a controlling legal question with substantial grounds for differing opinions, and that an immediate appeal could expedite the litigation's conclusion. Parties wishing to appeal have ten days from the order date to apply, but must convince the appellate court to hear the case, which could be denied for various reasons, including docket congestion.
Additionally, the order poses three questions for the parties to address regarding antitrust plaintiffs' proof of overcharges as evidence of market power, the necessity of proving supracompetitive prices with specific data, and the relevance of market definition in such cases. The order also requests discussion of the "Cellophane fallacy." Previous rulings related to Actavis are referenced, along with established views that patents do not inherently confer market power, supported by case law and economic consensus. The defendants argue against a presumption of market power stemming from patent ownership.
Agreement exists regarding the proposition of assessing fraudulently procured patents under Walker Process, which necessitates evaluating the exclusionary power of the patent in relation to the relevant market. This evaluation is essential to determine the defendant's capability to diminish or eliminate competition. It is acknowledged that some patents may possess little or no market power, but this does not imply that the ability to harm competition is unmeasurable or that such harm cannot be evidenced directly. The relevant market functions as a proxy for market power when direct evidence is absent; however, when direct evidence is available, the plaintiff is not required to define the relevant market. Challenges in proving anticompetitive effects often arise from isolating the market impacts of the alleged conduct, leading courts to typically accept evidence of the defendant's market power instead.
