Court: District Court, D. Massachusetts; February 9, 2017; Federal District Court
Ahold USA, Inc., Meijer, Inc., Meijer Distribution, Inc., Rochester Drug Co-Operative, Inc., and Value Drug Company (collectively "Direct Purchasers") filed an antitrust class action against Warner Chilcott Limited and its affiliates, as well as Allergan entities, claiming violations of Section 2 of the Sherman Act through monopolization, attempted monopolization, and product hopping. The Defendants sought to dismiss the allegations related to reverse payments and product hopping concerning a patent settlement with Zydus Pharmaceuticals and the introduction of Asacol HD. The Court granted in part and denied in part the motion to dismiss.
The Court applied a two-step inquiry for the Rule 12(b)(6) motion, first distinguishing factual allegations from conclusory ones, accepting only the factual claims as true. It then assessed whether the factual allegations plausibly narrated a claim for relief, drawing on judicial experience and common sense. The Court noted that in antitrust cases, dismissals before allowing discovery should be rare.
The Hatch-Waxman Act, enacted in 1984, aims to enhance the availability of affordable generic drugs. Key aspects of the Act include:
1. **New Drug Application (NDA)**: Brand-name drug manufacturers must submit an NDA to the FDA for approval prior to marketing new prescription drugs.
2. **Abbreviated New Drug Application (ANDA)**: Generic manufacturers can bypass certain NDA requirements by filing an ANDA, which must demonstrate that the generic drug is bioequivalent to the brand-name drug and contains the same active ingredients, dosage form, and strength.
3. **Patent Certification**: Generic manufacturers must certify that they will not infringe on any patents held by the brand-name manufacturer, with one option being the “Paragraph IV route,” where the generic certifies that the patents are either invalid or not infringed.
4. **Exclusivity Period**: The Act grants a 180-day exclusivity period to the first generic manufacturer that files an ANDA under the Paragraph IV route, during which the FDA cannot approve other ANDAs for the same drug. However, the brand-name manufacturer can still market an authorized generic during this exclusivity.
The factual background discusses ulcerative colitis, a chronic inflammatory bowel disorder that can lead to colorectal cancer if untreated. The most common treatment involves mesalamine-based drugs, including Asacol, Asacol HD, and Delzicol, which are designed to manage active flares and maintain remission.
A new drug manufacturer must obtain FDA approval under the Federal Food, Drug, and Cosmetic Act (FDCA) by submitting a New Drug Application (NDA) to demonstrate the drug's safety and effectiveness, and to disclose any relevant patents. Upon approval, the FDA designates specific indications for the drug's use. Within thirty days post-approval, manufacturers can list patents covering the drug in the FDA’s Orange Book. Asacol, a mesalamine tablet approved in 1992 for ulcerative colitis, later received additional approval in 1997 for maintenance of remission. By 2004, it became a top-selling pharmaceutical. Asacol HD, an 800 mg variant, was approved in 2008 for moderately active ulcerative colitis but not for mild cases or maintenance, with its patents set to expire in 2021. Delzicol, another mesalamine product, was approved in 2013 and has a patent expiring in 2020.
The Direct Purchasers allege that the case involves anticompetitive practices like product hopping and reverse payment agreements. Illegal product hopping occurs when a monopolist introduces a new product and engages in exclusionary conduct that limits market competition. This includes tweaking a drug to prevent generic substitution and performing a "hard switch" by removing the original drug from the market before patent expiration to hinder generic competition.
Anticompetitive reverse payments occur when a brand-name drug manufacturer induces a potential generic competitor to delay or abandon patent challenges through compensation, which limits competition and consumer choices for lower-priced alternatives. The Direct Purchasers allege that Warner Chilcott acquired Asacol and Asacol HD in October 2009, with Asacol being a top-selling drug at approximately $490 million in sales. As the patents for Asacol were set to expire in July 2013, Warner Chilcott promoted a transition from Asacol to Asacol HD, despite the latter being FDA-approved only for moderately severe ulcerative colitis flares, unlike Asacol, which treated multiple conditions. From late 2009 to 2013, Warner Chilcott's marketing efforts successfully increased Asacol HD's sales, though it plateaued at about one-fourth of Asacol's sales by the end of 2012. In mid-2012, Warner Chilcott initiated a strategy to replace Asacol with a new drug, Delzicol, which was launched in March 2013. Following the launch, Warner Chilcott discontinued Asacol on April 1, 2013, aiming to impede generic competition under the Hatch-Waxman Act. This withdrawal forced patients to switch to either Asacol HD or Delzicol, preventing the automatic substitution of a generic for Asacol prescriptions. The Direct Purchasers claim that Warner Chilcott designed Delzicol to obstruct potential generic competition, highlighting differences in inactive ingredients and tablet casing while relying on Asacol's clinical data for Delzicol's FDA approval based on bioequivalence.
Direct Purchasers claim Warner Chilcott's concerns regarding the dangers of DBP in Asacol were pretexts for creating Delzicol to engage in anticompetitive practices. Evidence cited includes the fact that Asacol HD, containing over twice the DBP amount of Asacol, continued to be produced until at least 2016, contradicting claims of safety concerns. Furthermore, Warner Chilcott's foreign subsidiary sold Asacol and Asacol HD with DBP in Canada without introducing DBP-free alternatives. The company allegedly cited the need to remove DBP only after the patent expiration in 2013, intending to make Asacol non-substitutable with Delzicol, thus extending patent protection until 2020.
Delzicol's cellulose capsule prevents generic Asacol from receiving AB-rating, making it non-substitutable under state laws, despite the change in inactive ingredients not being medically necessary. The capsule does not offer additional protection for the active ingredients, and Allergan’s DBP-free Asacol in the UK supports this claim. The size of Delzicol has also been criticized by patients, who are advised to remove the capsule for easier swallowing.
The Direct Purchasers argue that the discontinuation of Asacol effectively eliminated the market for generics, as it removed the cost-effective means for generic manufacturers to compete. They assert that had the switch to Delzicol not occurred, at least one generic version of Asacol would have been available by July 2013.
Warner Chilcott's anticompetitive practices led potential generic manufacturers to withdraw their Abbreviated New Drug Applications (ANDAs) for Asacol. The company successfully excluded these competitors from cost-effective distribution methods. In relation to Delzicol, Warner Chilcott used the '180 patent, which it holds and claims to have exclusive rights to until April 13, 2020, to shield its sales from generic competition. This patent, pertaining to the capsule rather than the drug itself, was improperly listed in the Orange Book, which the Direct Purchasers argue violates the Hatch-Waxman Act. As a result of this listing, generic manufacturers faced barriers to ANDA submission without certifying compliance with the patent claims.
The Direct Purchasers allege that Warner Chilcott exploited this improper listing to gain up to thirty months of protection from generic competition through filing frivolous infringement lawsuits. Specific examples include Teva Pharmaceuticals and Mylan Pharmaceuticals, both of which submitted ANDAs using Paragraph IV certifications that did not align with the '180 patent’s narrow claims. Warner Chilcott responded with infringement lawsuits against both, aiming to secure automatic stays of FDA approval for their generic products.
Additionally, Zydus filed an ANDA for a generic version of Asacol HD with a Paragraph IV certification in September 2011, challenging the validity of the relevant patents. Warner Chilcott subsequently filed a patent infringement suit against Zydus, activating a thirty-month stay on the approval of Zydus's product under the Hatch-Waxman framework.
In December 2013, Warner Chilcott and Zydus entered into a settlement agreement where Zydus agreed to withdraw its patent challenge against Warner Chilcott. In return, Zydus had two options regarding the generic manufacturing and marketing of Asacol HD. The first option allowed Zydus to launch its generic version by November 15, 2015, contingent on FDA approval of its Abbreviated New Drug Application (ANDA), while paying Warner Chilcott a 25% royalty on net sales. Warner Chilcott retained the right to supply its own authorized generic during Zydus's exclusivity period. The second option, termed the no-authorized generic (no-AG) option, permitted Zydus to wait until after July 1, 2016, to market an authorized generic supplied by Warner Chilcott, which would bar Warner Chilcott from supplying any other entity for two years. However, if Zydus received FDA approval for its ANDA, its right to market the authorized generic would cease. Under the no-AG option, Zydus would owe Warner Chilcott 75% of its profits. The Direct Purchasers argued that Zydus was economically incentivized to choose the no-AG option, as it would yield higher profits due to the absence of competition from Warner Chilcott's authorized generic. Estimated profits under the no-AG option were projected at $101 million, compared to $18.5 million under the first option. Zydus had little incentive to expedite its ANDA approval, as the more profitable no-AG option would be terminated upon such approval. The Direct Purchasers alleged that the agreement constituted an improper reverse payment settlement aimed at delaying generic competition and maintaining Warner Chilcott's monopoly profits.
Additionally, Warner Chilcott was accused of abusing the FDA petition process to hinder generic entry by submitting multiple petitions that sought to impose onerous requirements on generic applicants, which could significantly delay approval and increase development costs. Both of Warner Chilcott's petitions to the FDA for heightened testing and bioequivalency requirements were ultimately denied.
On September 13, 2016, the Direct Purchasers filed an amended consolidated class action complaint against the Defendants. The Defendants responded with a partial motion to dismiss, targeting the reverse payment allegations in Counts I and II and the product hopping claims related to Asacol HD in Counts I, II, and III. The Court has heard arguments on this motion and is currently reviewing it.
The Direct Purchasers argue that the Court should not evaluate the Defendants' dismissal arguments concerning the reverse payment claims separately. They emphasize that these claims are part of a broader monopolization scheme alleged in Counts I and II and do not seek independent anticompetitive liability. Citing case law, they assert that in antitrust cases, plaintiffs should be allowed to present the totality of their evidence without isolating individual actions. They argue that the combination of various actions taken by a monopolist must be considered collectively to assess antitrust liability, rather than judging each act in isolation. The Direct Purchasers reference precedents that support viewing a series of actions as part of an overall plan to violate antitrust laws, while cautioning that mere legal actions may not suffice to establish wrongdoing. They also mention prior case outcomes that illustrate the importance of evaluating individual components within the context of a larger antitrust scheme.
The Court is tasked with evaluating the specific claims regarding reverse payments made by Defendants to Zydus, while considering the broader implications of such claims. Reverse payments occur when a patentee compensates an alleged infringer, which can potentially violate federal antitrust laws. A large, unexplained reverse payment may indicate the patentee’s doubts about the patent's validity and suggest an intention to maintain elevated prices through collusion with the challenger, thereby harming competition. The Court notes that both cash and non-monetary reverse payments can have anticompetitive effects, necessitating scrutiny under federal law.
To establish a viable reverse payment claim, plaintiffs must demonstrate that the payment is substantial and unjustified. Defendants argue that Direct Purchasers failed to show that Warner Chilcott incurred any “out of pocket” expenses to Zydus, thereby contesting the existence of a reverse payment. Conversely, the Direct Purchasers have presented sufficient allegations of value transfer from Warner Chilcott, supporting the claim of an anti-competitive reverse payment. The Court references the Actavis case, which defines a suspect reverse payment as one where the patentee and challenger benefit at the consumers' expense, ultimately leading to an anti-competitive market scenario. Evidence provided by the Direct Purchasers suggests a profit-sharing arrangement between Warner Chilcott and Zydus, where Zydus agreed to suspend its patent challenge in exchange for benefits related to selling a generic version of Asacol HD.
Zydus agreed to delay the launch of an authorized generic version of Asacol HD until after July 1, 2016, in exchange for Warner Chilcott being barred from supplying an authorized generic for two years. During this period, Warner Chilcott would receive 75% of Zydus's profits from the generic, which the Direct Purchasers estimate to be around $101 million after royalties. This agreement allowed Warner Chilcott to benefit from delaying generic market entry while providing Zydus with substantial profits. The arrangement raises antitrust concerns as it suggests a reverse payment, potentially inducing Zydus to abandon patent challenges, which could harm competition. The First Circuit emphasizes that the value of such reverse payments is crucial in determining their legality, and the Direct Purchasers adequately alleged that a significant and unjustified reverse payment occurred. Defendants claim the agreement does not involve a costly transfer of value since Warner Chilcott retains 75% of profits. However, the focus of antitrust scrutiny under Actavis is on the size and implications of the payment rather than its absolute cost. The loss of the ability to produce an authorized generic is seen as a significant cost to Warner Chilcott, as it forfeits potential profits in a two-tiered market.
Warner Chilcott received a 75% royalty rate from the authorized generic, which differs from typical cases where no royalty is agreed upon. The Defendants' argument regarding the fairness of this royalty as equivalent to fair market value is deemed a fact-specific issue unsuitable for a motion to dismiss. The Court recognizes Warner Chilcott's rationale for its agreement with Zydus, which could indicate that the reverse payment was not anticompetitive. However, this rationale does not justify dismissing the Direct Purchasers' complaint, which claims a large and unjustified reverse payment. Under the rule of reason, once a plausible allegation of such payment is made, the burden shifts to the Defendants to prove it was not for delayed market entry or anticompetitive purposes. Affirmative defenses cannot be resolved at the motion to dismiss stage unless clearly established in the complaint, which is not the case here.
Additionally, the Defendants argue that the Direct Purchasers lack standing to bring reverse payment claims. Federal courts require plaintiffs to demonstrate standing by showing injury, causation, and redressability per Article III of the Constitution. For antitrust claims, standing is assessed through prudential considerations, including the causal relationship between the alleged violation and harm, the plaintiffs' injury type, and the directness of that injury. An absence of antitrust injury typically undermines standing.
Defendants argue that Direct Purchasers lack standing to claim overcharges for Asacol HD, as they have not shown that the Agreement between Zydus and Warner caused the delay in FDA approval and the subsequent failure to launch a generic Asacol HD before November 15, 2015. The Court must determine if the defendant's actions were a substantial cause of the injury, referencing Bristol-Myers Squibb Co. v. Copley Pharm. Inc. The Court previously dismissed similar claims from the Asacol End Payors for lack of standing, noting that the FDA's lack of approval was the primary barrier to Zydus launching a generic, regardless of the settlement. The Direct Purchasers similarly failed to demonstrate that the Zydus-Warner agreement was the but-for cause of the delayed generic launch, as no FDA approval for a generic Asacol HD application had been granted. This aligns with Solodyn, where the Court concluded that FDA approval, not a settlement agreement, was the critical factor limiting the generic's market entry. Without evidence of delay attributable to Defendants, the Direct Purchasers have not established a valid antitrust injury. Their amended complaint includes claims that the settlement incentivized Zydus to avoid FDA approval in favor of becoming an authorized generic distributor, suggesting significant financial benefits for this choice. However, the Court previously noted the lack of plausible allegations that the agreement would lead Zydus to market as Warner's authorized generic instead of its own product.
Warner Chilcott and Zydus allegedly structured their agreement to allow Zydus to market Warner Chilcott’s authorized generic first. However, this does not affect the Court's conclusion regarding the standing of the Direct Purchasers to bring a separate reverse payment claim, as Zydus would still need FDA approval to launch its drug even if it had litigated and won. The Direct Purchasers failed to demonstrate standing for this claim but may utilize their allegations to support claims related to an overall monopolization scheme, illustrating the context and motive behind the defendants' conduct, despite being unable to claim antitrust injury from the settlement.
The legal framework governing monopolization under Section 2 of the Sherman Act includes two elements: (1) possession of monopoly power in the relevant market and (2) willful acquisition or maintenance of that power, distinct from legitimate business growth. In the First Circuit, courts identify the use of improper methods to acquire or maintain monopoly power as "exclusionary conduct," which goes beyond competition on the merits. The elements of attempted monopolization consist of (1) predatory or anticompetitive conduct, (2) specific intent to monopolize, and (3) a dangerous probability of achieving monopoly power. The Direct Purchasers allege that the Defendants engaged in an exclusionary conduct scheme.
The Direct Purchasers allege that the introduction of Asacol HD and Delzicol, along with the removal of Asacol from the market, constitutes a coordinated effort by the Defendants to maintain or extend their monopoly over Asacol products. They argue that Counts I, II, and III are interconnected, asserting that the actions concerning Asacol HD from 2009 to 2013 cannot be viewed in isolation from the introduction of Delzicol. The Court agrees for Counts I and II, which address overall monopolization schemes, noting that earlier conduct can provide context for later alleged misconduct.
However, Count III, which claims a violation of Section 2 of the Sherman Act due to the product hop from Asacol to Asacol HD and Delzicol, is treated separately. The Court will assess whether the Direct Purchasers adequately pled a product hop claim regarding Asacol HD, considering that the two products were sold concurrently. The Court concurs with the Defendants that merely introducing a new product, even by a monopolist, is not inherently anticompetitive unless it can be shown that the conduct constituted an abuse of monopoly power or employed predatory means to monopolize the market. The precedent cases cited support this view, indicating that product withdrawal or introduction alone does not violate antitrust laws without evidence of anticompetitive intent or actions associated with those changes.
Actions by a monopolist that combine product withdrawal with coercive practices, rather than persuasive methods, can be deemed anticompetitive if they hinder competition. The case involving Asacol and Delzicol is scrutinized under this premise, particularly regarding allegations of a switch from Asacol to Asacol HD. The Direct Purchasers claim that Warner Chilcott, post-acquisition of both drugs, engaged in efforts to transition patients from Asacol to Asacol HD while both remained on the market. They assert that these actions did not constitute a hard switch, as both products continued to be available. The Direct Purchasers also allege that Warner Chilcott redirected its efforts toward Delzicol after the transition attempts stalled by late 2012, emphasizing that the introduction of Asacol HD did not require the withdrawal of Asacol for several years.
Legal precedents indicate that merely introducing a new product without removing an existing one does not inherently violate antitrust laws, as seen in Walgreen Co. v. AstraZeneca, where a similar claim was dismissed due to the retention of both products in the market, thus not infringing on consumer choice. The Direct Purchasers argue that even without a hard switch, a viable claim exists regarding a "product hop" from Asacol to Asacol HD due to illegal off-label marketing tactics aimed at undermining Asacol sales. However, case law, including Namenda, suggests that such allegations may not sufficiently demonstrate anticompetitive behavior.
The Second Circuit distinguishes between hard and soft switches in the context of anticompetitive behavior. Soft switches, such as the relationship between Asacol and Asacol HD, do not harm competition if consumer choice is preserved; both products were available simultaneously for four years, allowing consumers to choose Asacol over Asacol HD despite alleged marketing efforts by Warner Chilcott. The complaint indicates that consumer conversion to Asacol HD stagnated by the end of 2012, suggesting that marketing did not coerce consumers. The Third Circuit's Doryx case highlighted that minor product changes combined with coercive conduct might indicate potential liability in future cases. However, the absence of a hard switch from Asacol to Asacol HD means that factors relevant to assessing a hard switch's anticompetitive nature are not applicable. Thus, the allegations regarding a soft switch through marketing efforts are insufficient for a product-hopping claim under Count III. The Court dismisses the Direct Purchasers’ product hop claim for Asacol HD, but the claim concerning a hard switch to Delzicol remains. The Court partially grants and denies the Defendants’ motion to dismiss, retaining reverse payment allegations related to the overall scheme.
Counts I and II of the claims are addressed, with the product hop claim related to Asacol HD in Count III being dismissed. All other product hop claims remain intact. Defendants challenge the Direct Purchasers' service of process, noting insufficient compliance with the Hague Convention for entities incorporated outside the U.S., but the Direct Purchasers do not address this in their response. They assert that proving large cash transfers to Zydus is unnecessary as long as there is a claim of significant reverse payments made by Warner Chilcott. The Court finds that the Direct Purchasers have adequately alleged such payments, countering the Defendants’ motion for dismissal, which primarily focuses on the Asacol HD claim. The Defendants concede that previous court orders did not dismiss the End Payor Plaintiffs' claims and opted only to challenge Asacol HD, arguing that concurrent marketing of Asacol 400 and Asacol HD does not fulfill legal standards for a product hop claim. They also claim this marketing is protected speech under the First Amendment; however, the Court refrains from addressing constitutional issues as it dismisses Count III on other grounds. Ultimately, the Direct Purchasers have not substantiated claims that the introduction of Asacol HD was anti-competitive, as required by legal standards assessing market impact.
